Target Corporation (TGT) Earnings

Management highlights

- **Strategic Progress** - Target's refreshed growth strategy centers on serving busy families with a unique combination of style, design, quality, and value, with four core priorities: leading with merchandising authority, elevating the guest experience, accelerating technology, and strengthening the team and communities. Early results show encouraging momentum and growing confidence in the long-term trajectory. - Management prioritizes seven high-impact categories for disproportionate investment, which already contribute 50% of sales and are expected to drive future growth. - **Merchandising & In-Store Transformation** - Q2 completed the highest volume of in-store assortment and layout transitions in a decade, including changes to nearly half of the central store grocery assortment, a full reinvention of the Fun 101 floorplan, and replacement of 75% of home decorative accessories assortment. - 10,000+ items have received price cuts over the past 12 months, with 95% of back-to-school supplies priced at or below 2025 levels, and additional price reductions planned for the remainder of 2026. - High-profile exclusive collaborations performed exceptionally well: the Pokemon collaboration was one of Target's largest ever fan moments, and the Love Shack Fancy collaboration became the largest limited-time collaboration in Target's history, with most items priced under $25. - Upcoming merchandising changes include the launch of Target Beauty Studio in over 600 stores in Q3 2026, and major assortment updates for kids' home and bedding. - **Operational Highlights** - Inventory reliability metrics for top frequently purchased items reached multi-year highs, improving guest trust and satisfaction. 17 new stores opened in Q2, bringing the 2026 year-to-date total to 24 new full-size stores, with over 100 full-store remodels underway (on track for ~130 total in 2026). - Same-day and next-day order fulfillment grew nearly 30% YoY, with continued investment to improve delivery speed. New planning tools like the Proxima digital twin inventory system improve inventory flow planning and execution. - Overall guest satisfaction scores continued to improve, extending Q1 2026 momentum despite the high volume of in-store changes. - **Technology & AI Investment** - Target is an early partner with OpenAI, Google Gemini, and other leading AI platforms for agentic commerce. Digital traffic from external AI platforms is growing 3.5x faster than the industry average YoY. A new Chief AI Officer has been hired to accelerate AI development across the business. - AI-powered tools for back-to-school have driven 50% YoY growth in wish list creations, 2x growth in items added to lists, and 20% higher conversion on key back-to-school pages. - **Team & Capital Deployment** - Continued investment in team training, compensation, and workflow technology to reduce friction and free up more time for guest-facing service. Year-to-date 2026 capital expenditure reached $2.4 billion, up nearly 30% YoY, with full-year CapEx expected to hit $5 billion, focused on new stores, remodels, supply chain, and technology.

Guidance

- Full-year 2026 net sales growth guidance was raised to a range around 5%, an upward revision of 1 percentage point from the prior outlook. - Excluding the impact of IEPA tariff refunds, full-year adjusted operating margin is expected to be approximately 0.5 percentage points higher than 2025's adjusted rate of 4.6%. - Full-year adjusted earnings per share (EPS) guidance was raised from the prior range of $7.50 to $8.50 to a new range of $9.90 to $10.90. This updated range includes the $1.65 per share benefit from Q2 2026 tariff refunds, and excludes potential future additional refunds. Excluding tariff refunds, the midpoint of the new guidance range represents a $0.75 increase from the prior midpoint. - Target continues to expect to have capacity to resume share repurchases in the back half of 2026, with the pace and magnitude governed by operating performance, cash generation, CapEx plans, and its commitment to maintaining middle-A credit ratings.

Segment performance

Overall: Q2 2026 net sales reached $26.5 billion, up 5.3% year-over-year (YoY). Comparable sales grew 3.8% YoY, driven by 3.6% traffic growth with average ticket flat. Store comparable sales grew 2.7%, while digital comparable sales grew 8.7% led by 25%+ same-day delivery growth. High-margin adjacent businesses saw outsized growth: Roundel retail media gross billings grew nearly 20% YoY, Target Plus Marketplace GMV grew over 40% YoY, and Target Circle 360 membership revenue grew over 40% YoY. Category performance: Seven priority growth categories (beauty, health & wellness, food, baby & kid, women's style, home, culture-driven categories including toys/entertainment) currently represent 50% of total sales, and accounted for a disproportionate share of Q2 growth. Specific category results: 1) Food & Beverage: Post-central store reset, snack sales grew more than 15% YoY, with strong momentum in better-for-you options. 2) Fun 101: The reimagined category grew double digits YoY; refreshed Heyday electronics $10 headphone sales grew more than 35% YoY, Lego sales grew more than 30% YoY, and plush sales grew more than 20% YoY. 3) Apparel: Overall performance remains below target, but kids apparel saw double-digit growth in basics, with the tween Art Class brand up 50% YoY. 4) Home: Overall growth remains flat, but stores that received the 75% decorative accessories assortment reset have outperformed, with early positive guest response.

Risks & headwinds

- Underperformance in the large high-margin home and apparel categories remains a key risk to growth and earnings targets; management acknowledges performance is not where it needs to be, and transformation will require multi-year work extending into 2027 and beyond. - Executing large-scale in-store transformation across 2,000+ stores and a 400,000+ person team creates execution risk; pacing change to avoid compromising guest experience while continuing to deliver progress remains an ongoing challenge. - Future tariff cost and refund uncertainty creates volatility in reported earnings; management has mitigated current tariff pressure through sourcing changes, vendor collaboration, and assortment adjustments, but future tariff changes could impact margins or require additional price adjustments. - The large volume of planned change means not all initiatives will succeed; management acknowledges perfection is not the goal, and results will vary across initiatives, requiring ongoing prioritization and adjustment.

Analyst Q&A

• Q: With strong Q2 traffic momentum, how sustainable is this growth, and why has home and apparel underperformed despite higher traffic? /

  A: Strong traffic growth confirms guests are responding positively to Target's strategic changes and building trust, which management views as the top indicator of sustainable long-term growth. Sustained growth is already visible in priority categories that received updates (baby, wellness, beauty, food, Fun 101). Management is not satisfied with current home and apparel performance, but early changes in these categories (kids apparel, decorative accessories) are already seeing positive guest response, confirming the strategic path is correct; multi-year work remains to deliver sustained growth across these categories. The underperformance is partially due to longer lead times for change in these categories relative to faster-turning categories like food and beverage. In back to school, early results are very encouraging, with broad strength across school supplies, kids apparel, and dorm essentials, supported by improved in-stock reliability and strong demand for the Love Shack Fancy collaboration and value-focused Heyday electronics.

• Q: How do you reconcile continued price investments with your current strong price position, and what was the cadence of comps through Q2? /

  A: Target's brand promise is combining differentiated style and quality with low prices, so price investment is a permanent core priority rather than a response to weak pricing. This strategy has driven the 10,000+ price cuts over the past year, with additional cuts planned, and aligns with consumer demand for value in the current market. Top-line growth was consistent and strong across all months of Q2, and across all guest income brackets, with broad-based strength across demographics and categories.

• Q: Over the next 3-5 years, where is the largest underappreciated opportunity to boost earnings power? What has been the most surprising outcome of the current merchandising strategy, and where is the most untapped opportunity? /

  A: The biggest long-term opportunity is continuing to execute on the existing multi-year strategy: there is far more change still ahead of Target than behind it, especially in underpenetrated priority areas like apparel and home, where improving performance will unlock substantial earnings power. While changes are merchandising-led, the transformation is an enterprise-wide team effort requiring alignment across merchandising, supply chain, store operations, digital, and analytics; progress across all these functions simultaneously creates upside that is greater than the sum of individual initiatives. A key example of large untapped opportunity is beauty: after years of solid performance, the upcoming launch of Target Beauty Studio will create an entirely new elevated immersive experience with dedicated beauty advisors, with much larger long-term ambition for the category.

• Q: What percentage of the overall planned merchandising reset is complete, and how is Target positioned to continue evolving with shorter product cycles? /

  A: Rather than framing progress as a fixed percentage of a one-time project, management views transformation as a multi-year, ongoing process aligned with long-term category ambitions. Target is on track to deliver all the change it planned for 2026, and is pleased with the strong positive guest response to the changes completed so far. For home and apparel, there is substantial newness still to launch across upcoming seasonal cycles, and where changes have already been made, early results are encouraging; the transformation will continue across multiple seasonal cycles, with work extending into 2027 and beyond for home.