Highlights From Target Earnings: 3 Key Trends Investors Should Track

Key Points

• Target reported a sales decline in the second quarter, driven by a drop in comparable-store sales.

• Digital sales were strong, particularly pickup and same-day delivery .

• Tariffs are creating problems for the bottom line, although Target has taken steps to lessen their impact.

• 10 stocks we like better than Target ›

Retailer Target (NYSE: TGT) is struggling to navigate a difficult environment. The company's stores are losing traffic, and profit margins are contracting, partly due to tariffs.

A new CEO could help turn things around, but the company's second-quarter earnings were not what investors wanted to see. Here are three key trends Target investors need to keep an eye on as the company attempts to return to growth.

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Image source: Getty Images.

1. The stores are struggling

Target reported a comparable-store sales decline of 3.2% in the second quarter, and overall revenue dropped by 0.9%. These results were an improvement over the first quarter, when comparable-store sales plunged by 5.7%, but store traffic is still a problem. The number of transactions, which include digital sales as well as in-store sales, slumped by 1.3% in the second quarter.

Target is taking steps to make its stores more attractive to shoppers. On top of remodeling stores, incoming CEO Michael Fiddelke has set his sights on revamping the company's merchandising efforts. Chief Commercial Officer Rick Gomez noted that "newness and style forward products" are already driving improved hardlines sales. Some examples of winning categories include trading cards, brightly colored headphones, and toys priced below $20.

The company is also working on improving the store experience by ensuring key items are out of stock less often. Technology can help on that front. Target is investing in technology throughout its stores, supply chain, and digital operations to improve processes. Artificial intelligence (AI) is already making an impact, with Target using AI tools to help employees work more efficiently.

Target's stores continued to struggle in the second quarter, but sales are trending in the right direction.

2. Convenience is still king

Target's digital business, particularly its pickup and delivery options, remain popular among its customers. Digital comparable sales grew 4.3% in the second quarter, a solid result that partially offset the in-store weakness. Sales attributed to Drive Up, Target's curbside pickup service, grew by an unspecified amount during the second quarter, and same-day delivery sales exploded by 25% year over year.

Target fulfilled 97.7% of all sales through its stores, leveraging its nearly 2,000 stores to fuel its growing same-day delivery business. Shipt, Target's own delivery service, also works with retail partners to enable same-day delivery. This represents another digital growth opportunity for Target, and a recent move to eliminate markups for same-day deliveries across 100 retail partners could help fuel the growth of the platform.

While Target has work to do in multiple areas, its convenient assortment of pickup and delivery options continues to drive sales.

3. Tariffs are taking a toll

Target has done what it could to mitigate the impact of U.S. tariffs. This includes diversifying its supply chain and changing its assortment of products to ensure attractive price points can still be met. But there are limits, and the rest of the year is likely going to be tough as higher costs are paid by some combination of the retailer and its customers.

Target reiterated its full-year outlook for adjusted earnings per share, but the profitability picture deteriorated in the second quarter. Gross margin dipped by a full percentage point to 29%, even with higher advertising and non-merchandise sales. Operating margin fell by 1.2 percentage points to 5.2%. Target managed to decrease its selling, general, and administrative expenses slightly, but it wasn't nearly enough to prop up its profit margins.

Like every retailer, Target will need to find the right balance between absorbing tariff-related costs and reducing its margins, and passing them onto customers and risking further sales declines. It's a lose-lose situation and will make it more difficult for Target to turn around its struggling stores.

For investors, Target could be a compelling turnaround play. While the retailer's results may take a while to improve, the stock has tumbled from its post-pandemic high. If Target can fix its stores while continuing to grow its digital business, a rebound could be in the cards. However, tariffs are a wildcard that could make a comeback more challenging.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.