Target Q2 Earnings Beat on 5.3% Sales Growth, FY26 Guidance Raised

Target reported adjusted earnings of $4.11 per share, which increased meaningfully from earnings of $2.05 reported in the year-ago period. Second-quarter results included tariff refund benefits of $1.65 per share. Excluding these refunds, earnings per share increased 20% year over year. The bottom line comfortably beat the Zacks Consensus Estimate of $2.30.

The big-box retailer generated net sales of $26,539 million, which surpassed the Zacks Consensus Estimate of $26,129 million. The metric increased 5.3% year over year from $25,211 million.

Merchandise sales rose 5% to $25,947 million, while non-merchandise sales increased 20.1%, reflecting continued strength in Roundel advertising revenues, Target Circle 360 membership revenues and the Target+ marketplace. Advertising revenues improved to $279 million from $217 million in the prior-year quarter.

Comparable sales increased 3.8% against a decline of 1.9% in the year-ago quarter. The improvement reflected a 3.6% rise in traffic and a 0.2% increase in the average transaction amount. Comparable store sales rose 2.7%, while comparable digital sales advanced 8.7%, led by more than 25% growth in same-day delivery.

All six core merchandising categories registered year-over-year net sales growth in the quarter. Fun 101 posted double-digit growth, while Food & Beverage and Beauty delivered high-single-digit gains. Target also continued to see momentum from merchandising investments. The company transformed nearly half of its center-store grocery experience, with sales in snacks rising 15% year over year following the changes.

TGT’s Margin Performance

Gross margin expanded 470 basis points to 33.7% from 29% last year. The quarter included a 370-basis-point benefit from $994 million of tariff refunds. Excluding this benefit, gross margin expanded approximately 100 basis points year over year, reflecting a favorable comparison with last year's elevated markdowns and purchase-order cancellation costs, along with continued growth in advertising and other non-merchandise sales.

SG&A expense rate increased to 21.6% from 21.3% in the prior-year quarter. The increase reflected higher compensation costs, including additional hours for field teams and higher incentive compensation, as well as planned spending related to capital projects. These pressures were partly offset by leverage from strong sales growth.

Operating income soared 94.4% year over year to $2,560 million, while operating margin expanded to 9.6% from 5.2% in the prior-year quarter. The tariff refunds contributed 3.7 percentage points to the operating margin rate.

Target’s Financial Health Snapshot

Target ended the quarter with cash and cash equivalents of $5,411 million compared with $5,488 million at fiscal 2025-end. Inventory stood at $13,249 million versus $12,304 million at fiscal 2025-end and $12,881 million in the year-ago period. Long-term debt and other borrowings were $14,221 million, while shareholders’ investment totaled $17,843 million.

Capital expenditures increased 27% year over year to $1.4 billion, primarily driven by higher investments in store remodels and new stores. Target opened 17 new stores during the second quarter.

The company paid dividends of $518 million in the quarter, up from $509 million last year. It did not repurchase shares during the quarter and had approximately $8.3 billion remaining under its August 2021 repurchase authorization. For the trailing 12 months, after-tax return on invested capital was 15.4%, up from 14.3% in the prior-year period.

A Sneak Peek Into TGT’s FY26 Outlook

This Zacks Rank #2 (Buy) company raised its fiscal 2026 outlook following solid performance through the first half of the year. The company now expects full-year net sales growth in a range around 5%, one percentage point higher than its previous guidance.

Management expects the fiscal 2026 operating income margin rate to be around 6%, including approximately 90 basis points of benefit from the second-quarter tariff refunds. Excluding tariff refunds, the full-year operating margin rate is expected to be around 50 basis points above the adjusted operating margin rate of 4.6% reported last year.

Target also raised its adjusted earnings per share guidance to $9.90-$10.90. The range includes approximately $1.65 per share of second-quarter tariff refund benefits but excludes any potential future tariff refunds. Excluding the refund benefit, the midpoint of the updated guidance represents a 75-cent increase from the prior guidance range of $7.50-$8.50.

Management remains focused on strengthening Target’s positioning around style, design, newness and value. The retailer has reduced prices on more than 10,000 items over the past year and plans to continue investing in convenience, store experience and differentiated merchandise. Target intends to debut Target Beauty Studio in more than 600 stores and continue expanding new apparel and home concepts.

Final Words on Target Stock

The quarter’s sharp earnings and margin improvement were materially boosted by tariff refunds, but underlying gross margin trends also strengthened. Target’s focus on price, differentiated merchandise and operational execution appears to be gaining traction. The company is also expanding its digital capabilities, with traffic from external AI platforms such as OpenAI and Google growing more than 3.5 times year over year, and AI-powered recommendations and wish lists increasingly supporting digital conversion. With management raising its full-year sales and earnings expectations, Target enters the second half of fiscal 2026 with stronger momentum while continuing to invest in stores, fulfillment, technology and merchandising initiatives. 

Shares of Target have advanced 24.7% over the past three months against the industry’s 3.1% decline.

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