Target Quarterly Profit Doubles to $1.88 Billion. Is the Turnaround Finally Taking Hold?

After a long wait, Target (NYSE:TGT) finally delivered the strong quarterly earnings report that investors have been anticipating, showing the retailer's turnaround starting to take hold.

Target has bounced back from the depths of its post-pandemic bust as the market responded to hints of a recovery, and its second-quarter earnings report shows it is officially in turnaround mode.

Comparable sales rose 3.8% in the quarter, which, with the exception of its strong 5.6% growth rate in the first quarter, was its fastest growth in four years. Comparable traffic was up 3.6%, showing customers are coming back to its stores, and overall revenue rose 5.3% to $26.54 billion, which benefited from the growth of its ad business, Target Circle 360 membership revenue, and the Target+ marketplace. That topped the consensus at $26.14 billion.

Like other retailers, Target benefited from $994 million in pre-tax tariff refunds, but even excluding that, gross margin rose from 28% to 29% due to reduced markdowns and purchase order cancellation costs, and increased non-merchandise sales.

On a generally accepted accounting principles (GAAP) basis, Target's profit doubled to $1.88 billion, but that was mostly from the tariff refund benefit. Without it, net income would have been $1.13 billion, or $2.46 per share, up 20% from $2.05 per share a year ago and better than estimates of $2.34 per share.

What's driving the turnaround

Target has benefited from easy comparisons, but there are also real improvements in the business that bode well for future growth.

The company delivered growth in all six of its core merchandising categories: apparel and accessories; beauty; food and beverage; hardlines like electronics and toys; home; and household essentials such as paper and cleaning products.

The retailer drove traffic by getting more price-competitive, lowering prices on more than 10,000 items over a year ago, and it's invested in a differentiated retail experience with ongoing remodels.

Target's new Fun 101 initiative, its overhaul of hardlines, has been a clear winner, driving double-digit sales growth in those product lines, which include games, toys, video games, sporting goods, and more. Management is refocused on reclaiming retail leadership in the categories it's best positioned to lead, and "fun" is a good example of that. Like other brick-and-mortar retailers, Target can leverage the power of the "treasure hunt" effect, where customers delight themselves by finding something new in its stores.

The company aims to bring that strategy to other departments; it's already doing so in food and beverage, and it seems to be having promising results. It's added 4,600 new food items, including trendy and viral snacks, and expanded its international flavors. Target is trying to be less about selling only basics and more focused on stocking unique or trendy items, and customers are responding.

It's also investing in the baby category to win back families with new "baby boutiques" in about 200 stores and 2,000 new items from premium baby brands.

Why Target can keep moving higher

Target's guidance implied continued growth, as the company raised full-year sales guidance from 4% to 5% and, excluding the tariff refund benefit, sees its adjusted operating margin increasing from 4.6% in the quarter a year ago to 5.1%. It also raised its adjusted earnings per share guidance from $7.50-$8.50 to $8.25-$8.75, which also doesn't include the tariff refund.

New CEO Michael Fiddelke seems to have breathed new life into the company, and the business is getting its mojo back with strategies like Fun 101.

Target trades at a price-to-earnings ratio of less than 20 based on the updated guidance, much less than Walmart, and it offers a dividend yield of 3%.

There's still plenty of room for the stock to run.

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