Target Earnings: Strong Gross Margin Recovery Helps Offset Softening Consumer Demand

No-moat Target delivered solid third-quarter results as gross margin improvement outweighed the retailer’s second consecutive quarter of comparable sales declines. The firm posted $2.10 in earnings per share—surpassing its previous guidance of $1.20-$1.60—and raised the midpoint of its full-year EPS guidance by 9%. Despite the strong results, we think Target’s operating margin recovery from 2022 lows will take longer to fully materialize—we forecast a 6.0% operating margin by fiscal 2026 and a midcycle margin of 6.5%, down from 7.0% previously. Consumer spending continues to show signs of softening and while we surmise that the retailer is capable of adequately navigating a precarious holiday season, we still expect Target’s top line to be pressured through the remainder of the year and into 2024. Given our subdued sales outlook and our view that competitive angst among retailers is likely to intensify, we lower our fair value estimate by about 5% to $132 per share.