Comp -1.9% Improves Nearly 2pp from Q1; Michael Fiddelke Named Next CEO Effective Feb 2026; FY25 Adjusted EPS Guide $7-$9 Reiterated; FUN 101 Hardlines Transformation +5% Comp, Trading Cards +70% YTD; Champion Launch Strong — Initiating at Hold

Coverage Context — Why Target, Why Now

Target Corporation is the third-largest U.S. general merchandise retailer behind Walmart and Costco — nearly 2,000 stores, $107B+ in annual revenue, with a unique style-and-design merchandising identity. Over the past 2-3 years, Target's results have lagged peers as discretionary spending pressured and the company's signature merchandising authority eroded. Today's print is significant for two reasons: (1) CEO succession plan formalized — Michael Fiddelke takes over from Brian Cornell at the start of FY26, an internal candidate with 20 years at Target and a deep understanding of how the company performs at its best; (2) Q2 results showed the first sequential improvement in trajectory, with all 6 core merchandising categories improving from Q1. We initiate coverage at Hold to participate in the multi-quarter turnaround thesis while preserving optionality to upgrade as proof points materialize and downgrade if execution falters. Subsequent quarters in this backfill (Q3 FY25 → Q1 FY26) will track the trajectory.

Results vs. Consensus

Q2 Scorecard

Year-over-Year Comparison

Quality-of-Beat Callout

Revenue / Margin / EPS Assessment

Net sales -0.9% YoY to $25.2B. Store comp lower than digital. Traffic and basket trends both improved sequentially. Tale of two markets: discretionary categories like home and apparel pressured; food/beverage growing modestly; trading cards/gaming/toys robust on FUN 101 transformation.

Gross margin -100bp YoY: Decomposes as ~210bp pressure from merchandising (inventory adjustment costs from Q1 sales slowdown + tariff-related purchase order cancellation costs) partially offset by ~130bp shrink improvement. Management expects FY25 full-year shrink benefit of ~80bp (vs FY24's 40bp benefit) — bringing shrink rate back to pre-pandemic levels.

Adjusted EPS $2.05 (-20% YoY): The bulk of decline driven by combined impact of inventory adjustments + tariff costs. Management explicitly indicated "the bulk of this year's onetime tariff costs are also behind us" looking ahead — implying H2 comp performance should benefit from absence of these costs.

Inventory ended +2% above prior year, but units down low single-digits as price/cost pressures inflated inventory dollars while management invested in frequency categories for in-stock improvement. Management feels good about inventory position entering Q3.

The CEO Succession — Michael Fiddelke Takes Over Feb 2026

The most consequential disclosure of the quarter is the formalization of CEO succession. After 11 years as CEO, Brian Cornell will hand over the role to current COO Michael Fiddelke at the start of fiscal year 2026 (~February 2026).

Fiddelke Background

• 20+ years at Target across multiple roles
• Served as CFO from 2019-2024 before becoming COO
• Currently leading the "Enterprise Acceleration Office" launched in Q1 FY25 to drive transformation
• Internal candidate selected through "rigorous search" alongside external candidates per the Board

Fiddelke's Three Strategic Priorities

1. Reestablish merchandising authority across every category in a "distinctly Target" way
2. Elevate the guest experience consistently — both in stores and online
3. More fully use technology to improve speed, guest experience, and efficiency

"I know we're not realizing our full potential right now. And so I'm stepping into the role with a clear and urgent commitment to build new momentum in the business and get back to profitable growth. … We need to move faster, much faster, and we are."
— Michael Fiddelke, Incoming CEO

Initial Actions from Enterprise Acceleration Office

• Identified headquarters processes and technology slowing execution
• Redesigning cross-functional processes (merchandising/inventory planning)
• Increasing in-person collaboration expectations (hybrid workplace but more in-office)
• 10,000+ new AI licenses deployed across team
• Reevaluating tech initiatives for highest ROI and mission criticality

Assessment: The succession plan is well-orchestrated. Fiddelke is an internal candidate with deep institutional knowledge and the credibility to drive change. The 6-month transition window (announcement now, effective Feb 2026) creates clear accountability and continuity. The risk: internal candidates from established C-suites can struggle to break legacy patterns even when they intellectually understand them. We treat the appointment as positive but the magnitude of change in trajectory depends on execution over the next 12-18 months.

Segment / Category Detail

Discretionary Categories — Sequential Improvement

Discretionary categories collectively showed ~400bp improvement from Q1 to Q2 — the strongest sequential acceleration in the business. Led by:

FUN 101 (Hardlines) — +5% Comp

Best Q2 comp since 2021. Driven by:

• Trading cards: +70% YTD; on pace for $1B+ in sales this year; top-3 retailer market share. Pokemon, MAGIC, NFL, MLB, WNBA cards.
• Nintendo Switch 2 launch: Top retailer for hardware + software attach.
• Trend-forward tech accessories: Brightly colored headphones, phone cases.
• Sub-$20 toys: Share gains in affordable toy category.

Apparel — Champion Launch Strong

Women's denim +28% comp on new styles, silhouettes, washes. Champion for Target collaboration launched mid-Q2 — initial sales tracking better than expected with 500+ items across apparel, accessories, footwear, sporting goods.

Home — Continued Pressure

Home remains the most challenged category. Bright spots: Kids home (Pillowfort x Disney/Marvel), premium bedding (Casaluna). Broader home assortment requires multi-year reinvention work.

Frequency Categories — Modest Growth

Food and beverage grew slightly YoY. Newness in beverages (probiotic sodas, energy drinks, seasonal flavors), florals around Mother's Day. Beauty down slightly overall but core beauty (95% of total) saw skin/bath/haircare low-single-digit growth.

Digital Channel — +4.3% Comp

Digital comp +4.3% with same-day delivery (Target Circle 360) +25%. Roundel ad sales + Target Plus marketplace + Membership all double-digit growth. Same-day services account for ~2/3 of total digital sales.

Tariff Mitigation — $500M Impact Being Managed

Target is one of the largest U.S. importers — a significant tariff exposure. Management has been working since the start of 2025 to mitigate the impact:

• Diversifying country of production — reducing China exposure
• Evolving assortment — e.g., Bullseye's Playground committed to $1/$3/$5 price points; brought in Beauty Minis to hit price targets
• Supplier negotiations — broad pricing pressure on partners
• Price increases as last resort — preserving value perception

"Our commitment is to offer everyday good value and to have competitive pricing. … We'll take price as a last resort."
— Rick Gomez, Chief Commercial Officer

Assessment: Tariff mitigation has been a meaningful operational lift. Management framed FY25 P&L impact as "the bulk of onetime tariff costs are behind us" by end of Q2, with H2 cleaner. The underlying business will continue to absorb the steady-state tariff cost.

Ulta Beauty Partnership Ending August 2026 — Notable Strategic Overhang

Target and Ulta Beauty mutually agreed not to renew their partnership, which has placed Ulta-branded shop-in-shops in Target stores since 2021. The partnership concludes August 2026.

"Trends and expectations can change rapidly across virtually every sector of retail, but this is particularly true in beauty. … Over time, in light of shifting consumer trends, we believe we have a compelling opportunity to repurpose this space to meet those changing needs."
— Rick Gomez, Chief Commercial Officer

Assessment: The Ulta partnership end is an underappreciated near-term overhang. Ulta-branded beauty represented meaningful traffic and revenue contribution; replacing that with proprietary beauty space will require multi-quarter execution. The opportunity is genuine but the transition risk is real. Beauty has been one of Target's strongest categories historically.

Key Topics & Management Commentary

1. CEO Transition — Fiddelke "Day 1 Ready"

Brian Cornell's emphatic endorsement of Fiddelke as "day 1 ready" is the key framing. Fiddelke has been COO and is currently leading the Enterprise Acceleration Office — providing visibility into the operational priorities he'll bring to the CEO role.

2. Three Priorities Established

Merchandising authority + elevated guest experience + technology acceleration. These will be the analytical frame for evaluating progress over coming quarters.

3. Tariff Impact Being Mitigated

$500M+ tariff impact in FY25 largely mitigated through assortment + supplier negotiations + minimal price increases. H2 cleaner than H1.

4. FUN 101 Working — Proof Point for Merchandising Authority

+5% comp in FUN 101 (hardlines transformed into trend-forward, culturally-relevant assortment) is the concrete proof point for what merchandising authority looks like. Plans to apply same approach to home category.

5. Ulta Partnership Ending

Mutually agreed non-renewal August 2026. Beauty repurposing opportunity but transition risk.

6. Strategic Capital Allocation

Capital priorities unchanged for decades: (1) reinvest in business, (2) support and grow dividend, (3) repurchase shares within middle-A credit rating limits. ~$1.9B capital expenditures YTD; ~$4B full-year planned. No share repurchases in Q2 due to tariff uncertainty; resumed flexibility expected H2.

7. Stores as Fulfillment Hubs

Continuing to leverage stores as omnichannel fulfillment hubs — capital-light approach. New investments in technology and process improvements to streamline fulfillment process.

8. Long-Term Growth Targets

$15B sales growth target over next 5 years (low-single-digit CAGR). Specific operational levers needed to achieve this remain to be detailed.

Analyst Q&A

Pricing strategy + tariff mitigation

Q: "We wanted to ask a question focused on price. Just what price increases were taken during the second quarter as a result of tariffs? And what your expectation is for the second half?"
— Kate McShane, Goldman Sachs

A: "We feel that we are well positioned relative to other retailers given Target size and scale given the flexibility that we have with our multi-category business. … We are employing several different strategies including diversifying country of production, in some cases, evolving our assortment. … And then, of course, we're continuing to negotiate with our partners to ensure that we're offering everyday good value to the consumer. What we've said and it continues to be our position is that we'll take price as a last resort."
— Rick Gomez, Chief Commercial Officer

CEO succession + change agent commitment

Q: "The market has been looking from the outside and asking for a catalyst or an agent for change, how does the succession plan that has been put in place bring about the change that would improve the trajectory of the business? And how soon do you expect it will take to show substantial progress?"
— Michael Lasser, UBS

A: "There's real power in drawing on 20 years of knowing what makes Target, Target. Having seen us at our very best in different chapters gives me a clear focus on who we are in retail and what our unique path is that's going to lead to growth. And it centers on style and design. You're going to hear me come back to that over and over. … you can expect me to operate with candor, urgency and pace and making the changes that we need to get the growth we expect."
— Michael Fiddelke, Incoming CEO

Long-term framework + investment magnitude

Q: "I had a question just on the long-term growth framework that you've laid out. So you introduced the $15 billion of sales growth target over the next 5 years implies roughly low single-digit CAGR. Given the current headwinds, what are the key operational and strategic levers that you'll pull to achieve this target?"
— Corey Tarlowe, Jefferies

A: "I appreciate the question that starts with growth because that is the only path for us going forward. It is my sole primary goal as I step into role. … The path to get there is focused on the 3 priorities I laid out. We need to know who we are and we need to move with speed and urgency against the high bar for what product looks like on our shelves and what the experience looks like."
— Michael Fiddelke, Incoming CEO

Merchandising change + team mindset

Q: "With merchandising, how do you guys change the mindset of the team that's in place now? Like how do you stimulate that change, I guess, given the existing teams in place."
— Joe Feldman, Telsey Advisory Group

A: "Style and design is not new to Target. Style and design is core to our DNA, and that's kind of who we are and who we have been. We have built a design team and a sourcing team over decades that live and breathe trend and design. And the way we're going to build momentum is by building on the green shoots, leaning into where we see bright spots."
— Rick Gomez, Chief Commercial Officer

Tariff cost timing

Q: "If I heard in the prepared remarks, I thought you guys said the bulk of the tariff cost is behind. Can you maybe clarify that?"
— Joe Feldman, Telsey Advisory Group

A: "In Q1, as you might recall, I mentioned 2 primary headwinds facing us in the balance of the year, and that was related to inventory adjustment costs. All of those have been taken care of in the first half of this year. So we are clean from a second half perspective. And then we talked about tariff costs. The majority of the tariff-related costs that we had signaled was related to onetime costs, primarily driven by order cancellation costs except. The vast majority of that hit us in Q2. So you won't see significant portions of that going forward."
— Jim Lee, CFO

FY guide range drivers + labor investments

Q: "I guess to start off, just start going back to the full year guidance range. It's still a wide range on a low single-digit sales decline. So just curious the key factors that can drive results closer to the high end of that range. … just curious whether you see a need to make additional labor investments to execute on those priorities."
— Rupesh Parikh, Oppenheimer

A: "We've seen over the last half decade some incredibly good things happen in the business. We built a profitable $20 billion digital business. … And we know if you're a store director today or a team member in stores, the world has gotten more complex in our buildings than it was 5 years ago. … We've had a test in Chicago running this year where we've made some pivots and said some stores are built to fulfill. … We've been pleased with what we've seen in that test, both on the digital fulfillment side and especially on the store experience side."
— Michael Fiddelke, Incoming CEO

Internal vs external turnaround factors

Q: "At one point, the Target turnaround was talked about more discretionary categories rebounding more external factors. This call sounds a lot more internal. So can you give us a sense, what percentage do you think external versus internal?"
— Simeon Gutman, Morgan Stanley

A: "I'll stop shy of slapping a percentage on each of those, but I think it's worth acknowledging both. We've seen a consumer that had to be choiceful with their spend, we've seen inflationary pressure across their household spending. And we know that, that can lead to a pullback in some of the discretionary categories. … We've got work to do. We need to make sure we're leading on our front foot across every single category in our portfolio. The pockets of green shoots you heard Rick talk about, we need to turn those into a field of green shoots."
— Michael Fiddelke, Incoming CEO

Back-to-school + comp trajectory back to positive

Q: "I wanted to ask you about comp momentum. Maybe could you provide a little bit more color on what you've seen in back-to-school? And then as we think about the back half, how are you thinking about the puts and takes? Traffic compares are a touch easier. You probably have some tariff pricing. When are you thinking about when you can get back to positive comps?"
— Edward Kelly, Wells Fargo

A: "We do sit here right in the middle of back-to-school and back-to-college season. … We're encouraged by where we sit so far in both of those seasons. … back to college specifically, what we see the guests responding to is the trend in style and design leadership. Frankly, we had some opportunities last year with not leading with enough front-footed fashion in our back-to-college assortment, we've addressed to that this year, and it's been great to see the consumer lean in."
— Michael Fiddelke, Incoming CEO

What They're Not Saying

• Specific timeline to positive comps. Management deflected on the "when will comps turn positive" question.
• FY26 framework. No initial framing; will be detailed at financial community meeting in spring 2026.
• Ulta beauty space repurposing plans. "Opportunity" framing without specifics.
• Margin trajectory beyond FY25. Long-term operating margin expansion direction implied but not quantified.
• Detailed share buyback plans for H2. "Capacity to repurchase" framing without specifics.
• Specific Q3 / Q4 comp expectations. Range guidance maintained.

Market Reaction

• Pre-print (Aug 19 close): ~$102. Stock had drifted from year-highs on macro consumer concerns + tariff overhang.
• Day-of (Aug 20): Print landed pre-market. Initial reaction +3% on Q2 comp beat + CEO succession clarity + FY guide reiteration.
• Day-after (Aug 21): Stock closed ~$103 (+1%). Volume ~10M shares (~1.5x 30-day average).
• Peers (Aug 21): WMT flat; COST -0.5%; KSS +2%; M +1%. Retail mixed.
• Sell-side flow: Mixed reaction — some upgrades from Sell to Hold on improved trajectory; PT range $95-$130. Bull case: Fiddelke catalyst + sequential improvement. Bear case: Negative comp persists; Ulta partnership end risk.

Interpretive read: The market processed Q2 as "in line / slightly positive surprise." Stock at $103 reflects investor patience for Fiddelke transition + sequential improvement validation. The CEO succession framing has reset expectations from "permanent decline" to "potential turnaround."

Street Perspective

Debate 1: Can Fiddelke catalyze meaningful change?

Bull view: Fiddelke has 20 years of institutional knowledge + deep relationships across the org + already leading Enterprise Acceleration Office. He understands what Target looks like at its best (mid-2010s) and is candid about current shortfalls. Combined with 3 clear priorities, the recipe for change is in place.

Bear view: Internal candidates struggle to break legacy patterns. Target has tried multiple "back to growth" initiatives over recent years. The same management team makes the same decisions. Material change requires external perspective.

Our take: Fiddelke's positioning is credible but the proof will be in the next 4 quarters of execution. We give modest benefit of the doubt but require validation.

Debate 2: Is the FY25 guide achievable?

Bull view: FY25 EPS $7-$9 reflects reasonable mid-cycle bottom-line capability. Q2 sequential improvement + tariff costs largely behind + back-to-school early signals all support delivery within range.

Bear view: Wide $2 range reflects uncertainty. Consumer environment remains pressured. H2 comp comparison difficulty creates execution risk.

Our take: Central case is delivery in middle of range ($7.50-$8.50). Path to high end requires holiday season acceleration; path to low end requires further consumer deterioration.

Debate 3: How big is the Ulta departure overhang?

Bull view: Beauty has been a Target strength category. Repurposing space to expanded prestige + emerging brand + Target Beauty Studio concept could be net positive over time.

Bear view: Ulta has been driving meaningful traffic and revenue. Replacement strategy is unproven. Multi-quarter transition risk.

Our take: Real near-term overhang for FY26 H2 / FY27. Long-term opportunity if executed well but transition is meaningful.

Model Implications & Thesis Scorecard

Model Assumptions

• FY25 net sales: $107-$108B (-1% to flat); comp -2 to flat
• FY25 adjusted EPS: $7.50-$8.50 (midpoint of guide)
• FY25 FCF: ~$5B post CapEx
• FY26 framework: TBD at spring 2026 financial meeting
• Capital structure: middle-A credit rating maintained; dividend continued

Thesis Scorecard

Rating & Action

Initiating Coverage at Hold. Target is at a clear strategic inflection: new CEO (Fiddelke) announced with credible operational priorities, Q2 results showing first sequential improvement across all 6 core categories, tariff mitigation work largely complete, FUN 101 transformation generating concrete results. But the absolute results remain negative-comp territory, the CEO transition spans 6 months, the Ulta partnership end creates beauty category overhang, and the macro consumer remains pressured. Hold reflects "credible turnaround thesis but multi-quarter validation required."

Fair value range: $95-$125. Stock at ~$103 sits in lower-middle of our range. We re-evaluate up to Outperform on (a) consecutive quarters of comp acceleration, (b) FY25 EPS in upper half of guide range, (c) clear FY26 framework with positive comp expectations. We re-evaluate down to Underperform on (a) Q3 comp re-deceleration, (b) tariff cost re-emergence, (c) Ulta transition mismanagement.

Key watch items into Q3:

• Q3 comp trajectory — does sequential improvement continue?
• Holiday season setup signals
• FY25 guide refinement (final reiteration or modification)
• Capital allocation — share buyback resumption in H2
• Brian Cornell's final earnings call dynamics
• FY26 framework early signals
• Ulta partnership wind-down preparation