Comp +5.6% Crushes ~+2% Guide on Traffic +4.4%; Gross Margin +80bp to 29.0%; Adjusted EPS $1.71 (+32% YoY); FY26 Net Sales Guide Raised to ~+4% (from ~+2%) and EPS Pointed Toward High End of $7.50-$8.50; All 6 Core Categories Grew; Pokemon / Parke / Roller Rabbit / K-Pop Drops Drove Store Lines; Baby Comp Accelerated +5pp in Back Half — Upgrading to Outperform

Coverage Update from Q4 / Financial Community Meeting

Our Q4 FY25 + FCM recap maintained Hold at ~$108 with a $95-$130 fair-value range and laid out three conditions for re-rating to Outperform: (1) Q1 FY26 print delivering on the "early-year momentum" Fiddelke referenced at FCM; (2) FY26 H1 comp positive and accelerating; (3) early proof points that the category-level transformation work is resonating with the consumer.

The Q1 print clears all three with room to spare:

• Comp +5.6% on traffic +4.4% is not "momentum" — it is a clean, broad-based inflection.
• Gross margin expanding 80bp through the volume surge speaks to the operating model holding together under load.
• Baby +5pp acceleration in the back half of Q1, double-digit wellness comp, multiple sold-through partnership drops are the early proof points we needed.
• FY26 net sales guide moves from ~+2% to ~+4% with EPS guided to high end of $7.50-$8.50 — a credible, only-half-flowed-through raise that preserves cushion for the harder Q2 compare.

What we wanted to see on the next print, we got. Upgrading to Outperform.

Results vs. Consensus — Q1 FY26

Q1 Scorecard

YoY Comparison

2-Year Stack

Quality-of-Beat Callout

Segment / Channel Performance

Stores Channel

Stores net sales +~6% YoY, contributing ~2/3 of total dollar growth (~$1B+ of incremental sales). This is the channel narrative that matters most: stores are not the legacy drag in a digital-only growth story — stores are leading. The remodels-and-new-stores capital cycle ($5B FY26) is investing into the engine that is actually producing the comp inflection. Q1 included the opening of the 2,000th Target store, with 7 total store openings in the quarter and ~30+ planned for the year on a path to 300 net new stores by 2035.

Assessment. The stores-led narrative is what we wanted to see in support of the FCM framework. Same-day fulfillment runs through the stores ("more than 95% of sales fulfilled from stores"), which means every dollar of stores investment is also a digital investment. A retail comp +5.6% led by traffic in stores is exactly the proof point an Outperform thesis needs.

Digital Channel

• First-party digital sales: +~9% YoY
• Same-day delivery: +27% YoY (vs. ~+9% Q1'25)
• Target Plus (3P marketplace GMV): +~60% YoY
• Roundel ad business: grew (high-margin contribution to gross margin)

Assessment. Digital is no longer a story-stock segment for Target — it is a flywheel. Same-day delivery at +27% on a base that was already +9% a year ago is an exponential curve, not a recovery. Target Plus GMV +60% is the high-margin, capital-light optionality the FCM framework called out. The digital flywheel is now contributing measurably to both top-line growth AND gross margin mix.

Merchandise Categories

Management cited net sales increases in all 6 core merchandise categories. Standouts:

• Baby: Comp accelerated +5 percentage points in the back half of Q1 following the relaunch. 2,000 new items added starting at $1. Baby beacons and a baby concierge service in test in 200 stores. The "long-term loyalty bet" articulated at FCM is showing very early signals of working.
• Wellness/Health: Double-digit comp; 1,500 new items added; plans to refresh ~40% of assortment this year. Comp growth rate doubled vs. Q4 FY25 in wellness categories.
• Food & Beverage: 3,000 new items in Q1; new-item sales +50% vs. prior assortment. Largest center-store transition in over a decade now underway in Q2.
• Toys: Double-digit comp again, on $5/$10/$20 price points + Pokemon multi-category drop.
• Beauty: Continued momentum (10 consecutive years of growth) ahead of the Q3-Q4 Target Beauty Studio launch in 600 stores.
• Apparel + Home: Still below 2024 on a 2-year stack — the multi-year reinvention work. Decorative accessories transition in Q2 (75% of subcategory changing out).

Assessment. The category breadth is what separates this from a soft-comp-cycle bounce. Six-for-six on core categories with double-digit comps in toys and wellness, +5pp acceleration in baby, and ~$1B+ in incremental sales from stores says the consumer is responding to what's on the shelves, not to discounting. Home and apparel still below 2024 is the honest acknowledgment of the multi-year work remaining — and gives us upside if the H2 home/apparel transitions land.

Key Topics & Management Commentary

1. The Traffic Inflection

"Comp growth of 5.6% was driven primarily by a 4.4% increase in traffic, which more than offset a 2.4% decline a year ago. Top line trends were strong across multiple dimensions of our business … And importantly, we gained or held share in the significant majority of our divisions in the quarter and across income brackets as well."
— Jim Lee, CFO

The single most important number in the print. Traffic-led comp tells you the consumer made an active choice to visit Target rather than spending more on each visit out of necessity. Importantly, the +4.4% laps a -2.4% in Q1 FY25 — a 6.8pp swing in foot-traffic momentum is enormous for a $100B+ retailer. The "share gained or held in significant majority of divisions across income brackets" line answers the boycott/lapsed-customer question that was overhanging FY25.

Assessment. If we had to pick one number from this print to anchor the Outperform call on, it would be the +4.4% traffic. Tickets can be promotion-driven; traffic is preference-driven. The breadth of the share gain across income brackets is the second-most-important number — it answers the bear question of whether the recovery was concentrated in low-income or high-income cohorts.

2. The Gross Margin Surprise

"On the gross margin line, our first quarter rate of 29% was about 80 basis points higher than a year ago. This improvement was the result of productivity initiatives and leverage in our supply chain, growth in high-margin revenue streams like Roundel and Target Plus and lower markdown rates, partially offset by higher product costs."
— Jim Lee, CFO

This is the under-appreciated story. The market had calibrated for top-line strength + flat-to-down gross margin (volume surge usually pressures margin near-term, especially with elevated freight costs management flagged at FCM). Instead, gross margin expanded 80bp. The build: productivity + supply-chain leverage + Roundel/Target Plus mix-up + lower markdown rates beat higher product costs. The Roundel/Target Plus piece is structurally high-margin and growing — exactly the "high-margin revenue streams" lever the FCM framework identified.

Assessment. Gross margin +80bp through a +5.6% comp is the operational signal that this print is more than a sales bounce. Lower markdown rates indicate the merchandise sold through at full price, which is the cleanest possible read on assortment relevance. The Roundel/Target Plus contribution to gross margin is a structural mix shift, not a one-quarter benefit.

3. SG&A — The Deliberate Investment

"On the SG&A expense line, our Q1 rate of 21.9% was more than 2 percentage points higher than last year's rate of 19.3%. … last year's SG&A expenses included the benefit of legal settlements totaling nearly $600 million. Last year's adjusted SG&A rate, which excluded the benefit of those settlements, was 21.7%, about 20 basis points lower than this year. This year's adjusted SG&A expense growth of around 7% reflected the impact of investments in additional hours and training for our field teams along with higher incentives, planned spending related to capital projects, higher marketing spend and growth in general liability expense."
— Jim Lee, CFO

SG&A +7% YoY is the dollars going into the $1B P&L investment guided at FCM. Store payroll/training (Lisa Roath called out 300,000+ team members trained on new guest-experience standards), higher incentives (reflecting performance), capital-project expense (depreciation from new stores + remodels), marketing step-up, general liability (typically a category-driven line). These are the right places to be investing, and the investments are visibly working in the guest-experience metrics at 3-year highs.

Assessment. The +20bp rate vs. prior-year adjusted is consistent with the FCM-framed magnitude — modest deliberate compression now, in service of consistency improvement that supports comp later. With gross margin +80bp absorbing it, operating margin still expanded +80bp net.

4. The Cara Sylvester Merchandising Playbook

"While maintaining a strong core assortment across our categories, we're intentionally leaning in more aggressively behind a set of prioritized assortments and guest needs, areas where we can lead the market by being bold, distinctive and affordable. These focus areas represent about half of our sales today and are expected to drive roughly 3/4 of our growth going forward. They include building a leading beauty destination, expanding our role in health and wellness, being food forward, celebrating baby and kids, leading and women's style, inspiring the love of home and building culture-driven categories, including toys and entertainment."
— Cara Sylvester, Chief Merchandising Officer

This is the operating expression of the "busy families" core-guest strategy from FCM. The list is essentially the seven categories where Target either has structural advantage (beauty, baby, FUN 101/toys) or where Cara's reinvention work is in flight (home, apparel/women's). The math — "50% of sales / 75% of growth" — is the prioritization framework.

Specific Q1 proof points cited by Sylvester:

• Baby: "more than 5 percentage point acceleration in baby comp trends in the back half of the quarter" following relaunch
• Wellness: "double-digit sales growth … doubling comp growth rates in wellness-related categories compared with Q4 of last year"
• Food: 3,000 new items in Q1, "sales from those items growing more than 50% over the prior assortment"
• Toys / Pokemon / Parke / Roller Rabbit / K-Pop drops: "drew lines out of our stores" — 4 launches in Q1 alone

Assessment. Sylvester is delivering exactly the kind of category-by-category, proof-point-rich narrative we expect from a merchandising-led turnaround. The honesty about home and apparel still being below 2024 on the 2-year stack, paired with the Q2 plans for decorative accessories (75% reset) and beauty studio launch later in the year, says this is a multi-quarter execution arc that has more ahead than behind.

5. The Lisa Roath Operating Model

"In Q1, many of our store experience metrics reached 3-year highs with improved Net Promoter Scores and overall satisfaction regarding wait times, product availability, store cleanliness and interactions with our team. At the same time, we're clear-eyed about where we need to improve. Product findability and in-stock availability remain the biggest friction points for our guests, particularly in high-frequency categories like food and at critical times like evenings and weekends."
— Lisa Roath, COO

Roath's prepared remarks were the most detailed operating narrative Target has delivered in years. Highlights:

• Store-experience metrics at 3-year highs (NPS, cleanliness, checkout, team interactions)
• In-stocks improved YoY, with biggest gains on top items (food, essentials, beauty)
• Inventory turns +10% YoY (productivity flowing through the BS as well as the IS)
• 300,000+ team members trained on new guest-experience standards in Q1
• 2 supply chain facility openings: Houston receive center (~25M cartons/year) + Colorado food DC
• 100+ store remodels underway this year (on path to 300 by 2035)
• Jeff England hired as Chief Global Supply Chain & Logistics Officer

Assessment. Operating execution that supports the merchandising work. The capacity additions (Houston, Colorado) directly de-risk the "chase inventory" posture Fiddelke wants. England's hire from outside Target (decades of supply-chain leadership) is a meaningful signal that the operating model is being upgraded, not just maintained. Roath's "we are not yet where we need to be" tone on in-stocks is the right voice — the operating leg of the turnaround has more upside if it lands.

6. The FY26 Guide Raise

"For the full year, we are now planning for a net sales increase in a range centered around 4%. This outlook is 2 percentage points stronger than our prior range and reflects some moderation from our first quarter pace based on the reasons I outlined above. Turning to the bottom line. We previously provided an EPS range of $7.50 to $8.50. Given the profit upside we saw in the first quarter, we are now expecting to end the year near the high end of that range."
— Jim Lee, CFO

The math: net sales lifted from ~+2% to ~+4% (~+200bp). CFO Jim Lee was explicit that "approximately half of that increase of the full year guidance was driven by what we saw in Q1 and call it the balance for the rest of the year." That means ~+100bp of incremental balance-of-year top-line, with the Q1 outperformance fully flowed through. The EPS pointing to "high end" of $7.50-$8.50 is consistent: Q1 EPS upside flowed, balance-of-year held cautious.

Assessment. The guide raise is the most credible part of the print. Half-flow-through of a $1.71 vs. $1.30 EPS beat (~$0.40 over) implies ~$0.20 of "true" raise on the year — which gets you from $8.00 midpoint to ~$8.20, comfortably "toward the high end" of $7.50-$8.50. Conservative posture preserved for Switch-2 lap in Q2 and Ulta transition in H2. We expect the FY26 print to come in at the high end or slightly above the raised guide.

7. The Q2 Setup (Hardest Compare of the Year)

"Notably, in the quarter just ended, we faced the easiest prior year comparison of the year, and we'll be facing the hardest comparison in Q2, a nearly 2 percentage point difference as we begin lapping last year's launch of the Nintendo Switch 2. Furthermore, we believe this year's higher tax refunds were a source of upside to consumer spending in Q1 and that benefit will be feeding over the rest of the year."
— Jim Lee, CFO

The honest framing on Q2. The Switch 2 lap is ~2pp of headwind vs. Q1; tax-refund tailwind partially fades. Investors should expect Q2 comp meaningfully below +5.6% — likely +1% to +3%, with the print's character mattering more than the headline (traffic vs ticket, category breadth). The Q2 setup is also when the dry-grocery reset (largest in over a decade) and the decorative-accessories home overhaul (75% of subcategory changing out) start to land in guest-visible ways.

Assessment. The Q2 setup is the first stress test for the Outperform thesis. A clean +2-3% comp print on traffic, with gross margin holding, would be a strong follow-through. A flat-to-negative comp on traffic, especially in toys/FUN 101 (Switch-2 lap), would force a re-think. We are willing to underwrite the Q2 lap on the breadth of the Q1 category strength.

8. Pokemon, Parke, Roller Rabbit, K-Pop — The Partnership Engine

"With social engagement significantly exceeding prior collaborations and some of the strongest launch week sales we've ever seen from our limited time offerings. These partnerships show that when we combine great product with cultural relevance, we create moments that drive traffic, engagement and excitement for our brand. And for fans of all ages, our only at target cross-category Pokemon collaboration helped to position Target at the center of one of the most powerful global franchises. The launch earlier this month set sales and social media engagement records for us, and we're excited about another drop taking place later this quarter."
— Cara Sylvester, Chief Merchandising Officer

Four limited-time drops in Q1: Parke, Roller Rabbit, BTS / K-Pop, and Pokemon (multi-category — Pop Tarts to starter jackets to Caboodles). Each drew lines outside stores at open. Pokemon set sales and social-media engagement records for Target. Another Pokemon drop is planned for later in Q2.

Assessment. The partnerships are doing two jobs at once: (1) generating buzz/traffic in real time, and (2) signaling Target's cultural relevance. The reframe from "occasional limited-time partnership" to "consistent always-on cadence of culturally-driven drops" is the operational expression of "leading with merchandising authority." Critically, these are not margin-dilutive promotions — they are full-price, sold-through events. The 4-drops-per-quarter cadence is the new run rate.

9. Capital Allocation — Buyback Capacity Later in Year

"We did not engage in any share repurchase activity during the first quarter. Looking ahead and assuming our business continues to perform well, we should have some capacity to repurchase shares later in the year with the magnitude and pace governed by our outlook and our goal to maintain our current middle A credit ratings."
— Jim Lee, CFO

Zero buybacks in Q1. $516M in dividends paid (+1.8% per share). $1B CapEx in Q1 against the $5B FY26 plan. The "capacity to repurchase shares later in the year" framing, paired with the EPS guide raise, signals optionality on H2 buyback that the bear case had assumed would not materialize until FY27.

Assessment. The buyback capacity language is the cleanest signal that the balance sheet is in a position to support the framework. Middle-A credit rating is the binding constraint, not earnings capacity. We expect $500M-$1.5B of buyback in H2 FY26 if Q2/Q3 trends hold.

10. The "Cautious Posture" Framing

"While we have momentum, we're also being cautious about the near-term operating environment, with consumers weighing multiple headwinds and tailwinds and recent dips in consumer sentiment, we continue to place a premium on flexibility not wanting to swing too hard too quickly despite the early signs of momentum we're seeing. As we've shared before, we like our business model when we're needing to chase inventory in the face of stronger-than-planned sales much more than when we find ourselves needing to cancel purchase orders or markdown excess inventory."
— Michael Fiddelke, CEO

The cautious framing is exactly the right tone for a turnaround coming off one good quarter. It also signals what we should expect on Q2: continued chase-inventory posture, willingness to leave some upside on the table in exchange for inventory health, conservative balance-of-year guidance.

Assessment. The "chase inventory rather than cancel POs" framing has real margin implications — lower markdown risk in H2, healthier gross margin trajectory, lower clearance impact on Q4 holiday positioning. This is the operating posture that supports the gross margin +80bp print AND the subsequent margin trajectory.

11. The 2-Year Stack Honesty

"Despite this early progress, we know our work is just beginning as we were lapping softer results in Q1 of 2025. And while we're pleased that this year's Q1 net sales were also 3.7% higher than in Q1 of 2024, that's well below the level of 2-year growth we aspire to deliver over time. In categories like Fun101, beauty and food and beverage, we're seeing mid-single-digit compound growth on a 2-year basis, while sales in home and apparel were still below 2024."
— Michael Fiddelke, CEO

The +3.7% 2-year stack number is the discipline check on declaring victory. Mid-single-digit 2-year compound in FUN 101 / beauty / food is solid; home and apparel below 2024 is the work still to do. This is exactly the right framing — celebrating Q1 honestly while keeping the multi-year reinvention narrative intact.

Assessment. The 2-year stack discipline is what gives the Outperform call its asymmetry. If home and apparel get back to above 2024 over the next 4-6 quarters (the decorative-accessories Q2 reset + the broader home reinvention + the fast-apparel model), the comp run-rate has another leg up. The bear case on FY27 is "FY26 was a soft compare and FY27 normalizes back to flat"; the multi-year recovery in still-depressed categories says otherwise.

FY26 Guidance Detail

Analyst Q&A — Selected Exchanges

Sustainability of changes vs. SG&A trim

Q: "Michael, I wanted to ask about the key changes that you've made that you feel that really have some sustainability or sticking power throughout this year. As you think about a lot of the organizational changes that you've made, you've also trimmed SG&A to a degree. I believe you highlighted cutting 8% of the workforce previously. So there's definitely a commitment to accelerating change while keeping costs controlled. And I just wanted to hear a little bit more about your perspective there as we continue to build for more profitable growth going forward."
— Corey Tarlowe, Jefferies

A: "It's all about growth. The strategy we've laid out with a clear focus on us winning in our unique lane. And we know that when we lead with style and design, while delivering incredible value in the products we sell, that's why the focus on elevating our merchandising authority and how we sell it, elevating our guest experience. We're all aligned as a team around those priorities, and they're informing every decision that we make. And we know the P&L hangs together well when we get growth. You saw that in the first quarter where a strong first quarter top line outcome translated to better-than-expected bottom line outcome."
— Michael Fiddelke, CEO

Assessment. The headcount-reduction question was about whether the cost discipline pulls profit forward at the expense of growth investment. Management's answer — that the P&L "hangs together" when growth comes — is exactly the right framing. The HQ headcount cut + the $1B P&L investment work in opposite directions on SG&A; the net is investment biased to where growth is (stores, marketing, tech).

Comp momentum into Q2 + reinvestment of the Q1 upside

Q: "I just was curious what you're seeing in terms of comp momentum and due to date? And then how are you thinking about reinvesting some of the upside from the comps going forward to keep up the momentum that you've seen in the first quarter so far?"
— Spencer Hanus, Wolfe Research

A: "We started the year with a clear view of where we needed to invest behind the strategy. We spent a lot of time in our financial community meeting outlining what that strategy is. That's only made real when we make decisions against that strategy and invest with conviction against what we know will work. … On Q2, there's some unique things from last year like the Nintendo Switch launch that we know or are added some momentum in Q2 of last year. It was the strongest quarter of last year. And so we'll anniversary that in Q2, that's on our mind. But we're excited about how we've seen the consumer responds to what we're doing in the first quarter. We've got a lot more change coming in the second quarter and beyond."
— Michael Fiddelke, CEO

Assessment. The "no read-and-react reinvestment" framing is important. Management is not throwing the Q1 upside back into the business — they are letting the EPS guide raise stick. The Q2-to-date comment is intentionally vague but explicitly references "a lot more change coming in Q2" (dry-grocery reset, home decorative accessories) as the next-quarter momentum driver, not a continuation of Q1 levels.

In-stocks and product availability progress

Q: "We wanted to ask a few questions around inventory. Thanks for the commentary so far. But we were wondering if you could speak specifically about in-stocks and product availability on the shelf how this is being addressed, what improvements have been made and how it's being measured."
— Katharine McShane, Goldman Sachs

A: "Impacts are absolutely critical to our guest experience, and we have not been where we need to be but we are making solid progress. We talked about how our in-stocks improved year-over-year. One thing we're excited about is that the fastest improvement that we saw were in our most important items, the top items that our guests are shopping most frequently with target. So I think categories like food, essentials and beauty. … We're working to use AI to improve our demand forecasting, which helps reduce some of the volatility that can lead to some of those in-stock issues. We talked about the team investment. We're really excited to have Jeff be joining the team with his breadth of experience across the industry."
— Lisa Roath, COO

Assessment. In-stocks are still the biggest friction point Roath highlighted in prepared remarks. Progress is real but partial — top-item availability improved meaningfully, but management explicitly says they're not yet where they need to be. This is upside if the operating work continues to land — better in-stocks = lower out-of-stock churn = higher comp + margin durability.

Cadence of merchandising overhaul (Q1 vs. full year vs. 2027)

Q: "I think if I heard right, Cara mentioned 40% of merchandise will be revamped or is it reset or changed. Can you talk about what percentage of the overall merchandising overhaul is underway in Q1? What percentage will be by the end of the year? And then if there's any into 2027."
— Simeon Gutman, Morgan Stanley

A: "It looks different by category. … Every category is on a little bit of a different time frame. … For us to bring the right newness over time, you can expect us to continue to invest in the future and bringing what's new and relevant, leading with style and design, what's relevant and culture that's been so important about driving the continued success we've seen in a category like Fun101, we're a little farther down the path some of that reinvention. But there's other categories where we're just getting started. I mean home is going to be multiyear work for us to get that category back to where we expect it to be over time. But we're not waiting to start that work."
— Michael Fiddelke, CEO

Assessment. The framing — "we're just getting started" in home, "a little farther down the path" in FUN 101 — is the right multi-year story for the analyst community. The 75% decorative-accessories transition in Q2 is concrete and near-term. The kitchen-and-storage transition in 2027 is the explicit signal that the home recovery is an FY26-FY28 arc, not a one-quarter event. Buy and hold.

Margin flow-through + self-funding the investments

Q: "I do want to focus on margins for a second. The incrementals were pretty good in the first quarter, maybe SG&A a little high, and it looks like a similar level of flow-through implied for the back half, even though the top line may slow a little. So can you talk about the complexion the ability also to see higher flow through over time. And I think some of this goes into self-funding these investments that you've laid out for the year."
— Simeon Gutman, Morgan Stanley

A: "SG&A was higher, it's up 7% in Q1. And that's indicative of the investments that we had outlined during the financial community meeting. So there's no surprises. We're making the right investments to drive sustainable long-term growth. And I'll emphasize, it's early in the year. We're 1 quarter down. There's still a lot of work ahead of us. So we've guided and flowed through the upside you saw in Q1 EPS to sort of the high end of the range that we provided earlier and we'll continue to update as we go along. … getting productivity on a continuous basis and then having top line growth that drives leverage will fuel our margin expansion over time."
— Jim Lee, CFO

Assessment. The margin-expansion algebra — "productivity on a continuous basis + top line growth that drives leverage" — is exactly the FCM-articulated path. Q1 delivered both ($1B annualized run-rate savings from FY25 1,800 HQ reduction + the +5.6% comp leverage). Expect operating margin to expand each quarter through FY26 if comp stays positive.

Beauty Studio progress + vendor interest

Q: "And then my follow-up question is just on Beauty. A lot of momentum in the quarter. It looks like the spring resets are going well. As you launched that beauty studio, what are you seeing so far from vendor interest? Like how is that progressing versus expectations?"
— Rupesh Parikh, Oppenheimer

A: "We're super excited about the change that will unfold as we get to the back half of the year. And so a lot of work leading up to that transition moment later this summer. … the Beauty business has been a source of strength for us for a long, long time. I mean we've got 10 years running of growth in beauty. Our ambition is to just truly be an incredible beauty destination for our guests and our working beauty studio play an important role there."
— Michael Fiddelke, CEO

Assessment. Management is light on vendor-interest specifics — likely intentional given competitive sensitivity around prestige assortment recruitment ahead of the Q3/Q4 Beauty Studio launch. We continue to view the Ulta transition (H2 FY26) as the single biggest near-term operational risk inside the Outperform thesis. The 10-year continuous growth track record in beauty is the foundation that mitigates the transition risk.

How much of the Q1 strength was actions vs. tax-refund tailwind / boycott fade

Q: "I think we're all trying to figure out how much of the first quarter performance was due to the actions that Target has taken versus exogenous variables like tax refunds. So if we look at your first quarter performance at a 5.6% comp versus what your guidance implies for the rest of the year it suggests around a 1% comp, admittedly, you just flowed through the first quarter outperformance, but still, should we take the difference between those 2, 5.6 versus 1, is what you think with maybe some unique factors to the first quarter? And alternatively, maybe another way to get at this is you have great data. How much are you seeing longer loss guests come back and that would be a sign that maybe some of the boycotts are diminishing and guests are giving you another shot."
— Michael Lasser, UBS

A: "I'd probably stop shy of the precision implied in the math that you were doing there. because I think a few things are true. As we look at the consumer, we see a consumer that continues to be resilient. And they had some headwinds and tailwinds they were managing in the first quarter. And so we'll continue to watch those closely. We saw strength coming from traffic. We saw strength that was broad-based across categories and guest demographics. So those are all positive signs for us as we look ahead for sure. But importantly, we saw real change on the heels of where we may change to what we were offering and how we were selling it."
— Michael Fiddelke, CEO

Assessment. Management declined to attribute % of comp to tax-refund tailwind vs. lapsed-customer return vs. actions taken — sensible, since the answer is fundamentally unknowable. But the share-gained-across-income-brackets comment AND the broad category strength AND the +4.4% traffic together say more of the Q1 outperformance is "actions taken" than the bear case credits. The Q2 / H2 print is when we'll see whether the recurring-comp run-rate normalizes near +2-3% or sustains higher.

FY26 EPS confidence — what's changed since FCM

Q: "Do you — what gives you the confidence to raise to the upper end of the range at this point in the year? I know Jim, last year, talked about a baseline of $8 to $10 in earnings that you could eventually grow off of. So as you sit here today, is the message simply like we have visibility on the cost side. We have that line of sight in our inventories clean. So we're just getting back into the range and then there would be maybe some variability around sales. So — or is it that you're making, I guess, a greater bet in terms of the gross margin outlook, whether that's keeping inventory clean and having full price sell-through?"
— Christopher Horvers, JPMorgan

A: "We entered the year with a pretty clear eye view of where we wanted to make investments. And the thing we have with 1 quarter under our belt is to see how the early path of those investments is starting to play out. And the response we're seeing to where we've made change gives us encouragement as we look at the balance of the year. And we've got a lot of work in front of us. We laid out a really ambitious plan for this year. It will be the first of a series of years of ambitious plans would be my guess. And we're 1 quarter into that."
— Michael Fiddelke, CEO

Assessment. The "first of a series of years of ambitious plans" line is the most forward-looking statement Fiddelke made on the call. It implies multi-year runway for the framework — and supports our view that the FY27/FY28 setup is more attractive than the consensus model.

What They're Not Saying

• A specific operating margin rate target for FY26. Implied higher than the 4.8% guided at FCM (given EPS toward high-end with similar sales), but not quantified.
• A specific buyback dollar amount or pace for H2. "Some capacity later in the year" — directional only.
• Quantification of Ulta replacement performance ahead of Beauty Studio launch. Some vendor recruitment in flight, no specifics shared.
• Tariff impact on FY26 (vs. FCM framework). "Monitoring closely; guidance reflects what we're seeing as scenarios on freight as well" — directional only.
• Customer cohort detail (lapsed vs. new vs. existing). Share-gained-across-income-brackets is as far as management would go.
• Specific Q2 comp expectation. Acknowledged hardest compare of year but no point-estimate provided.
• Long-term margin recovery trajectory. FCM said "definitely yes" to pre-pandemic levels; no updated framework on cadence.

Market Reaction

• Pre-print (May 20 close): ~$108. Stock had drifted modestly since FCM, with the bull case requiring Q1 confirmation.
• Pre-market (May 21): Indicated +8% to +12% on the print + raised guide. Volume expected ~3x average.
• Implied next-day close: ~$117-$121 range based on pre-market indication. We expect intra-day digestion of the magnitude of the beat to bring the close toward the upper end.
• Peers: WMT +1% pre-market on the read-across (broad-based consumer strength); COST +0.5%; KSS +3-4% (lapsed-guest-return read-across); M +2% (department-store recovery read-across).
• Sell-side flow expectations: Multiple upgrades from Hold to Buy expected. PT range likely $120-$150. Bull case: traffic-led + margin expansion + raised guide + multi-year recovery story. Bear case: Q2 compare + Ulta H2 + sentiment slip.

Interpretive read. The market has been waiting for the Q1 print since FCM, and the magnitude of the beat — comp 3.6pp above guide, EPS 31% above Street, gross margin expanding 80bp through a volume surge — is enough to force a re-rate. We expect the stock to take out $115 on the day and trade in a $115-$130 range over the next 4-6 weeks as Street models reset. The next inflection catalyst is the Q2 print in August.

Street Perspective

Debate 1: Is the +5.6% comp the new run-rate or a soft-compare bounce?

Bull view: Traffic-led, broad-based across all 6 core categories, share gained across income brackets, and accelerating in baby/wellness/food. The Q1 FY25 -3.8% comp was a soft compare, but the magnitude of the +5.6% on top of an easy base AND the breadth of the recovery means the underlying run-rate is meaningfully higher than +1-2%. FY26 net sales guide raise to ~+4% is the partial flow-through; H2 has room for further upside if home and apparel inflect.

Bear view: Easy comp + tax-refund tailwind + buzzy partnership drops (Pokemon, Parke) + reset-cycle benefit could mean Q1 was a high-water mark. Q2's Switch-2 lap (~2pp headwind) + H2 Ulta transition + consumer-sentiment slippage could pull the back-half run-rate to flat. The +3.7% 2-year stack is "well below" Target's aspiration.

Our take: The underlying run-rate is +3-4% comp, not +5.6% (which lap-driven) and not +1% (which was the soft-compare contingency in guidance). Q1 was the high point of FY26 comp; Q2 likely +2-3% on traffic with the merchandising work continuing to land. The bull case math holds if 2-year stack reaches +5-6% by Q4 FY26.

Debate 2: Is the +80bp gross margin expansion sustainable through FY26?

Bull view: Roundel + Target Plus are structurally high-margin and growing 50%+; FY25 1,800 HQ cuts (~$200M annualized) flow productivity gains; supply-chain leverage from volume; lower markdown rates with healthy inventory. All four drivers persist through FY26.

Bear view: Product cost inflation (tariffs, freight) accelerates in H2; markdown rates lap easier comparisons (Q4 FY25 was clearance-heavy); investment in beauty studio launch + home transition disruption could compress merchandise margin. Q1 was the easiest comp on margin too.

Our take: Gross margin expansion sustains at +40-60bp on the year (vs. +80bp Q1). The Roundel/Target Plus structural mix is the durable piece; the markdown improvement narrows by Q4. Operating margin trajectory still positive, with EPS toward high-end of $7.50-$8.50 well-supported.

Debate 3: Will the Ulta transition (H2 FY26) be a stumble or a clean handoff?

Bull view: Beauty Studio launching in 600 stores in fall with multi-year vendor recruitment in flight; 10-year continuous growth in beauty provides foundation; team has had ~12 months to plan the transition; assortment expansion + premium service model = upgrade, not downgrade.

Bear view: Ulta-in-Target has been a meaningful traffic and revenue driver since 2022; H2 transition window risks promotional intensity, missed prestige drops, in-store presentation gaps; replacement Beauty Studio executes on a tighter timeline than the Ulta build.

Our take: The biggest single near-term operational risk inside the Outperform thesis. Probability of a clean transition: 60%. Probability of 1-2 quarters of meaningful beauty-comp pressure: 30%. Probability of a multi-quarter drag: 10%. We watch carefully through Q2 (vendor signals) and Q3 (launch execution).

Model Implications & Thesis Scorecard

Model Update

• FY26 estimates raised: Net sales ~$110.5B (+4.5% — slight beat to guide); EPS ~$8.50 (high end of $7.50-$8.50); op margin ~5.0% (+40bp vs. FY25)
• FY27 estimates: Net sales growth +3-4%; EPS $9.25-$10.00; op margin expansion continuing toward 5.5%
• FY28 estimates: Net sales growth +3-4%; EPS $10.00-$11.00; op margin trending toward 6%+
• Long-term framework: Operating margin recovery toward pre-pandemic levels (high-single-digit). $1B+ FCF in FY26 supporting $5B CapEx + dividend + selective buyback.

Thesis Scorecard

Rating & Action

Upgrading to Outperform. Three months ago at the Financial Community Meeting we maintained Hold pending a Q1 print that would confirm the framework's early-year momentum. The Q1 print does that and more: comp +5.6% vs. ~+2% guide, traffic +4.4% (6.8pp YoY swing), gross margin +80bp through the volume surge, adjusted EPS +32% YoY, FY26 net sales guide raised to ~+4% (from ~+2%) with EPS pointed to the high end of $7.50-$8.50, all 6 core merchandise categories grew, share gained across income brackets, and the operating model is responding (3-year highs in guest-experience metrics, inventory turns +10%). The Fiddelke / Sylvester / Roath leadership team — three first quarterly calls in their new roles — delivered a unified, credible narrative anchored on the FCM "busy families" framework with specific category-level proof points (baby +5pp acceleration; wellness double-digit comp; food forward 3,000 new items at +50% sell-through; Pokemon/Parke/Roller Rabbit/K-Pop drops). This is the cleanest single-quarter inflection in a $100B+ retailer we have covered in years.

Fair value range moves to $115-$155 (from $95-$130). The mid-point of the new range is ~$135, ~25% above the pre-print ~$108 close. We size the upgrade with the recognition that (a) Q2 will print materially below +5.6% on the Switch-2 lap, (b) the Ulta-to-Beauty-Studio transition is the single biggest H2 operational risk, and (c) the +3.7% 2-year stack still acknowledges multi-year recovery work remaining.

What would change our view:

• Upgrade further (toward Strong Buy in our framework): Q2 comp print at +3-4% on traffic with gross margin holding +50-80bp; clean Beauty Studio launch in fall; FY27 framework articulated with comp +3-4%+ trajectory.
• Downgrade back to Hold: Q2 comp flat-to-negative on traffic (would suggest Q1 was largely tax-refund-driven); gross margin contraction +0-20bp in Q2 (would suggest the merchandise margin tailwinds are exhausting); Ulta transition execution slippage visible in H2 comp; consumer-sentiment material deterioration.

Key watch items into Q2 FY26 (Aug 2026):

• Q2 comp performance under Switch-2 lap — character matters more than headline (traffic vs. ticket; category breadth)
• Dry-grocery reset early performance (Q2 transition — largest in over a decade)
• Home decorative-accessories reset (75% of subcategory changing out)
• Beauty studio vendor recruitment signals ahead of Q3/Q4 launch
• Buyback execution (capacity flagged for "later in year")
• FY26 EPS guide confirmation (high end of $7.50-$8.50)
• Consumer-sentiment trajectory through summer
• Tariff cost trajectory and 2H moderation framing