Target Just Posted Its First Sales Growth in 5 Quarters. So Why Did the Stock Drop Anyway?

Shares of big-box retailer Target (NYSE: TGT) slid about 4% after the company reported its fiscal first quarter of 2026 (the period ended May 2, 2026) earlier this week. At first glance, this reaction may be surprising. After all, the quarter offered the clearest evidence yet that Target's long-awaited turnaround is taking hold. And management was confident enough to raise its full-year sales forecast.

Target said its comparable sales -- a measure of sales trends at stores and digital channels open for at least 13 months -- rose 5.6%, the company's first positive reading in five quarters.

So why did the stock fall anyway?

Image source: Getty Images.

The turnaround is showing up

To appreciate how notable a 5.6% comparable-sales increase is for Target, it helps to remember where the retailer has been. Its comparable sales fell in each of the prior four quarters -- down 3.8%, then 1.9%, then 2.7%, then 2.5%, even as bigger rival Walmart kept growing. So, the swing back into positive territory, Target's strongest comparable-sales gain in about four years, marks a real change in direction.

Even more, Target's business momentum was broad-based in the quarter. Its net sales rose 6.7% to $25.4 billion, with all six of Target's core merchandise categories growing and store traffic up 4.4%. And digital comparable sales jumped 8.9%, led by same-day delivery through the company's paid Target Circle 360 membership. Meanwhile, Target's higher-margin non-merchandise revenue, driven by its advertising business and its third-party online marketplace, grew nearly 25%.

Much of this lands at the feet of Michael Fiddelke, who took over as CEO on Feb. 1 and quickly framed 2026 as a year of aggressive change. During Target's fiscal first-quarter earnings call, Fiddelke said the team would "make more change to what we sell and how we sell it in 2026 than we've seen in a decade." And early results suggest the strategy may be resonating with shoppers.

What may have given investors pause

But here's where the picture gets more complicated.

While the top line looked great, Target's reported profit moved in the wrong direction. Net income fell to $781 million, or $1.71 per share, from $1.04 billion, or $2.27 per share, a year earlier. That said, the comparison is misleading. Last year's fiscal first quarter included a one-time windfall: Target booked a gain of roughly $0.97 per share after winning a long-running credit card fee lawsuit in which it was the plaintiff. Strip out that legal payout, and the comparable profit a year ago was about $1.30 per share -- which means this year's $1.71 actually represents growth of around 32%. So the apparent earnings decline is more an accounting quirk than a step backward for the business.

Given this explanation for the profit decline, a key reason for the stock's pullback is likely a cautious signal from management. Chief financial officer Jim Lee noted that much of this year's cost pressure -- including accelerated depreciation tied to new stores and remodels, as well as slightly higher inventory losses -- is concentrated in the first half and should ease later in the year. And while Target raised its full-year sales growth target to about 4%, double its earlier projection, it didn't substantially lift its earnings forecast but instead only said it expects its earnings to be toward the high end of its previous guidance of $7.50 to $8.50 -- a quieter signal that the profit recovery doesn't have the same momentum as its sales recovery.

Finally, here's one more piece worth weighing (and probably the most important piece): the stock has already done a lot. Target shares have climbed about 28% in 2026 and now trade not far below their 52-week high, suggesting a good deal of turnaround optimism is already baked into the price. At about 17 times earnings as of this writing and a dividend yield of about 3.6% (one Target has raised for more than 50 straight years), shares aren't expensive, but they're not the bargain they were either.

Overall, given how far the stock has run and how much execution still lies ahead, I wouldn't be a buyer here. I'd rather see a few more quarters of progress -- or a better entry point -- before stepping in.

Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target and Walmart. The Motley Fool has a disclosure policy.