Target's Q3 Earnings Confirm Persistent Headwinds Amid Turnaround Efforts

What happened

Target released its third-quarter 2025 earnings, showing a 1.5% decline in net sales and a 2.7% drop in comparable sales due to soft discretionary demand and ongoing macroeconomic pressures. Margins contracted as gross margin fell to 28.2%, exacerbated by shrink and tariff risks, while the stock price has slid approximately 46.6% over the past year. Despite growth in digital comparable sales and an 18% rise in non-merchandise revenue, these positives were insufficient to offset broader operational challenges. Management's full-year 2025 EPS guidance of $7.70–$8.70 remains below 2024 levels, highlighting the uphill battle in restoring profitability. Investors are now reassessing the retailer's ability to execute its self-help plan amid leadership transitions and persistent external headwinds.

Implication

The Q3 results underscore that Target's turnaround is faltering, with weak demand and margin pressures signaling heightened execution risk despite a discounted valuation. While the stock trades at a low P/E and potential upside exists if self-help initiatives succeed, the lack of progress in comps and margins suggests further downside if conditions worsen. Key monitoring points include comparable sales turning positive, gross margin holding above 28%, and effective management of shrink and tariffs under new leadership. Failure to show tangible improvements in the next few quarters could erode the margin of safety and justify a more bearish view. Thus, a wait-and-see approach is warranted, with any buy decision hinging on clear signs of operational recovery and sustainable free cash flow.

Thesis delta

The Q3 earnings reinforce the existing thesis that Target is an execution-sensitive turnaround with potential upside if operational improvements materialize. However, the persistent soft demand and margin compression highlight increased risks, emphasizing that the investment case remains highly contingent on near-term progress. No fundamental shift has occurred, but the urgency for evidence-based execution has intensified.