MINNEAPOLIS — Target Corp. raised its full-year outlook after delivering stronger sales, traffic and profitability in the second quarter, providing further evidence that the retailer’s efforts to sharpen its merchandise assortment, improve value and expand its digital capabilities are gaining traction.
Target said second-quarter net sales increased 5.3% from a year earlier to $26.5 billion, while comparable sales rose 3.8%. Comparable traffic increased 3.6%, indicating that the sales gain was driven primarily by more shoppers rather than higher spending per visit.
The results represented an acceleration from the first quarter. On a two-year basis, Target’s net sales compounded annual growth rate was 2.1%, 30 basis points better than in the previous quarter.
“Second quarter results build on the encouraging momentum we saw in the first quarter, giving us increasing confidence that our strategy is resonating with our guests and strengthening our leadership position in style, design, and value,” said Michael Fiddelke, Target’s chief executive officer.
Growth was broad-based across channels and merchandise categories. Comparable store sales increased 2.7%, while comparable digital sales climbed 8.7%, led by growth of more than 25% in same-day delivery.
Net sales increased in all six of Target’s core merchandising categories. The retailer reported double-digit growth in its Fun 101 category and high-single-digit gains in Food & Beverage and Beauty.
Target has made price and value a central element of its strategy, lowering prices on more than 10,000 frequently purchased items during the past year while continuing to invest in new products, style and design.
“Over the past year, we've reduced prices on more than 10,000 frequently purchased items as part of our commitment to delivering outstanding value every day, while continuing to invest in newness, convenience, and an elevated shopping experience,” Fiddelke said.
The retailer also continues to generate rapid growth from businesses outside traditional merchandise sales. Non-merchandise sales increased 20.1%, reflecting gains from its Roundel advertising business, Target Circle 360 membership program and Target+ marketplace. Merchandise sales rose 5%.
Target’s bottom line benefited significantly from tariff refunds during the quarter. GAAP and adjusted earnings per share doubled to $4.11 from $2.05 a year earlier. The quarter included $994 million of pretax tariff refund benefits, which added $752 million to net earnings and $1.65 per share to EPS. Excluding those benefits, earnings per share increased 20% from a year ago.
Operating income reached $2.6 billion, compared with $1.3 billion in the year-ago quarter. Target’s operating margin increased to 9.6% from 5.2%, with tariff refunds accounting for 3.7 percentage points of the latest quarter’s margin.
Gross margin was 33.7%, also including a 3.7-percentage-point benefit from the refunds. Excluding that impact, gross margin expanded by approximately 100 basis points from last year’s 29%, helped by a comparison against elevated markdowns and purchase-order cancellation costs a year ago, as well as continued growth in advertising and other non-merchandise revenue.
Selling, general and administrative expenses increased slightly as a percentage of sales, with the SG&A expense rate rising to 21.6% from 21.3%. Target attributed the increase to higher compensation costs, including additional hours for store and field teams and higher incentive compensation, along with planned spending related to capital projects. Strong sales growth partially offset those expenses.
Based on its first-half performance, Target raised its expectations for the full year. The retailer now expects net sales growth around 5%, one percentage point above its previous guidance range.
Target also expects a full-year operating margin of about 6%, including approximately 90 basis points of benefit from the second-quarter tariff refunds. Excluding the refunds, the company expects its operating margin to be about 50 basis points above last year’s adjusted margin of 4.6%.
Full-year GAAP and adjusted EPS are now projected at $9.90 to $10.90, including approximately $1.65 per share from the tariff refunds. Excluding that benefit, the midpoint of the new range is 75 cents higher than the midpoint of Target’s previous guidance of $7.50 to $8.50.
The improved outlook comes as Target steps up investment in its physical store network. Capital expenditures totaled $1.4 billion during the second quarter, up 27% from a year earlier, primarily reflecting increased spending on store remodels and new locations.
The company paid $518 million in dividends during the quarter, up from $509 million a year ago, but did not repurchase shares. Target ended the quarter with approximately $8.3 billion remaining under its existing share-repurchase authorization.
Return on invested capital also improved. For the trailing 12 months through the second quarter, after-tax ROIC reached 15.4%, compared with 14.3% a year earlier.
Fiddelke cautioned that Target’s turnaround remains a work in progress even as the retailer gains momentum.
“While there's still meaningful work ahead, we're encouraged by the progress we're making and remain focused on executing with discipline, staying agile in a dynamic operating environment, and investing in our team and capabilities to drive sustainable, profitable growth over the long term,” he said.
