Target's Turnaround Is Finally Here. So Why Is the Stock Down?

After years of slogging through the retail wilderness, Target (NYSE: TGT) had good news for investors on Wednesday: It's alive.

The retailer surprised the market with comparable sales up 5.6%, its best performance in years, on a 4.7% increase in comparable traffic, showing that customers are returning to its stores. New CEO Michael Fiddelke said that the results "were stronger than expected, providing encouraging early signs that our clarified strategy is resonating with our guests."

Overall revenue rose 6.7% to $25.44 billion, which easily beat estimates at $24.66 billion. The company also delivered margin improvement with an adjusted operating margin up from 3.7% to 4.5%, and adjusted earnings per share rose from $1.30 to $1.71, ahead of the consensus at $1.46.

Among the highlights in Q1 were that sales increased in all six of its core merchandising categories, and it reported 27% growth in same-day delivery on digital sales growth of 8.9%. Non-merchandise sales, which includes membership programs like Target Circle 360 as well as its Roundel media network grew nearly 25%.

Target also raised its guidance for the full year, saying it now expected net sales to grow around 4%, compared to a previous range of 2%, and for net sales to grow every quarter this year. It called for a full-year operating margin of at least 4.8%, up from the 4.6% in reported in 2025, and it sees adjusted EPS near the high end of its previous guidance range of $7.50-$8.50.

Target stock was up in pre-market trading, but it dipped during the earnings call and remained down in the regular session. As of 2:04 p.m. ET, the retail stock was down 4.8%.

Image source: Target.

Why Target gave up its gains

Part of the reason for the strong performance was that Target was up against easy comps. In the quarter a year ago, comparable sales declined 5.7%, so the company is essentially just recouping those lost sales with this report.

Management also said that growth would slow in the second quarter, when it faces tougher comps due in part to the release of the Nintendo Switch 2 a year ago, cooling off the initial strong reaction.

Additionally, some of Target's recovery already seemed baked into the stock, as shares are up 23.1% as investors bought into new management's talk about a recovery earlier this year.

The company also expressed some cautiousness around the health of the consumer, noting poor consumer sentiment, the potential benefits of tax refunds in the first quarter, and the impact of inflation, including high gas prices.

Is Target a buy?

At this point, based on its guidance, Target isn't yet back to its full potential, and profit margins still lag significantly behind their peak during the pandemic.

Fiddelke has made management changes that will hopefully spruce up stores and give a boost to growth. However, the risk/reward seems fairly balanced at the current price, especially given the broader risks in the economy, including higher inflation from the war in Iran.

Target now trades at a price-to-earnings ratio of just 15, which is a good price for a healthy and growing retailer. At this point, it may be premature to call Target that, especially after management commentary on the rest of the year.

I think Target still has a lot of turnaround potential, but I'd like more evidence of its progress before calling the stock a buy. If management is cautious, it could be for a good reason.

Jeremy Bowman has positions in Target. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.