TGT Gains 15.3% in the Past Month. Can the Rally Keep Its Momentum?

TGT's Traffic Gains Strengthen the Sales Story

Second-quarter comparable sales rose 3.8%, driven mainly by a 3.6% increase in traffic. Average transaction amount increased just 0.2%, indicating that more guest trips, rather than higher spending per visit, did most of the work.

The sales improvement was broad. All six core merchandising categories posted year-over-year growth, while comparable digital sales advanced 8.7%. Same-day delivery grew more than 25%, adding another sign that Target's omnichannel investments are supporting demand.

Target's Margin Recovery Has an Important Caveat

Gross margin expanded 470 basis points year over year to 33.7%, but tariff refunds accounted for 370 basis points of that improvement. The $994 million pretax refund also contributed $1.65 per share to second-quarter earnings, making the tariff refund a major factor in the reported earnings increase.

Underlying margins still moved in the right direction. Excluding the refund, gross margin improved about 100 basis points and operating margin rose roughly 70 basis points. That progress partly reflects easier markdown comparisons and growth in higher-margin non-merchandise revenues.

TGT's Higher-Margin Businesses Add Another Lever

Non-merchandise sales increased 20.1% in the second quarter. Roundel gross billings rose nearly 20%, Target Plus marketplace gross merchandise value increased more than 40% and Target Circle 360 membership revenues grew more than 40%.

Advertising revenue reached $279 million, up from $217 million a year earlier. As these media, marketplace and membership businesses scale, they can diversify Target's earnings mix beyond merchandise sales and provide another path for underlying profitability improvement.

Target's Valuation Could Limit Further Upside

TGT trades at 18.3X forward 12-month earnings, above its five-year median of 14.9X. The multiple remains below the Zacks sub-industry's 30.2X, the sector's 22.9X and the S&P 500's 20.5X, but the premium to Target's own history suggests more recovery is already reflected in the price.

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Walmart Inc. WMT is one of the value leaders Target faces, adding pressure to keep prices competitive. Costco Wholesale Corporation COST is another value-focused rival, which raises the bar for Target to defend traffic while protecting margins.

TGT's Strong Style Scores Meet a Neutral Signal

The recent rally has better fundamental support than a price move alone would suggest, but the setup is less forgiving after a 15.3% monthly gain. Improving traffic, digital growth and underlying margins support the case, while valuation and the largely nonrecurring tariff benefit temper the near-term picture.

TGT currently carries a Zacks Rank #3 (Hold). Its VGM Score of A and Momentum Score of A, together with a Value Score of B and Growth Score of B, indicate favorable characteristics across major investing styles. Because the Style Scores complement rather than override the Zacks Rank, the combination supports a balanced view after the recent advance. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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