Target’s Q2: Better Than Feared—but a CEO Surprise Steals the Tape

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Target (TGT) delivered a “better-than-feared” second quarter on the numbers, but the market isn’t celebrating. Shares are down nearly 10% pre-market as investors key on succession headlines: longtime insider and current COO (and former CFO) Michael Fiddelke will succeed Brian Cornell as CEO on Feb. 1, 2026, with Cornell becoming executive chair. While the print modestly topped expectations and guidance was reaffirmed, the disappointment stems from hopes for an external hire to catalyze a faster turnaround in merchandising, store execution, and digital profitability. In sympathy, Walmart (WMT) ticked lower pre-market as well.

Headline results and key comps. Target posted adjusted EPS of $2.05 (vs. $2.03 cons.) on revenue of $25.21B (vs. $24.93B), with net sales down 0.9% y/y. Comparable sales fell 1.9%, with store comps –3.2% offset by digital comps +4.3%. Transactions fell 1.3% and average ticket slipped 0.6%. Operating income of $1.32B declined 19.4% y/y, and the operating margin rate compressed to 5.2% (from 6.4%). Gross margin was 29.0% (vs. 30.0% last year), pressured by higher markdowns, purchase order cancellation costs, and an unfavorable category mix; SG&A rate delevered to 21.3% (from 21.1%) on lower sales despite disciplined cost control.

Bright spots: digital and non-merch. Despite ongoing traffic softness, two profit-resilient engines improved:

• Digital grew +4.3%, driven by >25% growth in same-day fulfillment (Target Circle 360 and Drive Up).
• Non-merchandise revenue rose +14.2%, with Roundel (ad), membership, and marketplace all growing double digits. These streams helped offset merchandise margin pressure and are central to the earnings bridge while discretionary categories remain sluggish.

Drivers under the hood. The quarter’s P&L tells a familiar story: the company leaned on cost discipline and efficiency gains to buffer tariff-related headwinds, higher markdowns, and mix pressure (hardlines—electronics, toys—carry lower margins). Management also cited inventory actions (including cancellation costs) and continued investment in stores and tech. Importantly, trends improved vs. Q1: sales and traffic were “meaningfully better,” especially in stores, and all six core merchandising categories improved sequentially—even as comps remained negative.

Guidance intact, capex steady. Management reaffirmed its full-year framework: a low single-digit sales decline and adjusted EPS of ~$7–$9 (GAAP $8–$10). The outlook embeds tariff costs and lingering category softness but assumes offsets from shrink improvement, cost programs, and growing non-merch profits. Capital deployment stays pragmatic: ~$4B FY capex for new stores, remodels, supply chain, and technology; no Q2 buybacks (remaining authorization ~$8.4B); $509M in dividends paid. TTM ROIC stands at 14.3% (vs. 16.6% a year ago). Interest expense inched up to $116M on higher average debt; effective tax rate was 23.2%.

Succession: why the market flinched. The board named Fiddelke after a broad search, emphasizing his 20-year enterprise knowledge, cross-functional experience (merchandising, finance, ops, HR), and credibility with teams. Still, many investors wanted an external change agent following 11 straight quarters of flat or falling sales and multi-year share loss to WMT, COST, AMZN. The stock’s pre-market reaction reflects skepticism that an internal promotion will accelerate fixes in merchandising distinctiveness, store standards, and digital unit economics. Lead independent director Christine Leahy framed the choice as deliberate and future-facing; Fiddelke himself called his tenure an “asset,” arguing it enables a candid diagnosis and faster execution.

What Fiddelke plans to do. He outlined three priorities:

Reclaim style/design leadership in merchandising (early green shoots in kids’ home décor via Pillowfort x Disney/Marvel).

Deliver consistent in-store experience (staffing, standards, and service).

Leverage technology to improve speed and efficiency across ops (from supply chain to digital fulfillment). Those sit within the new Enterprise Acceleration Office, which he currently leads, aimed at compressing decision cycles and scaling what works.

Category and partnership context. Management acknowledged lost ground in home, a historical strength, after veering too far into “core” at the expense of fashion and design. Beauty remains resilient, but the Ulta in-store partnership will end in Aug 2026. Target argued its ex-Ulta beauty sales have grown annually since 2010, signaling confidence in self-directed category growth. That said, replacing a traffic-driving co-brand will require clear assortment and experience wins.

Why the print was still “better than feared.” Street positioning heading in was cautious: negative comps, tariff noise, and discretionary softness. Against that, Target beat on EPS and sales, kept guidance, and showed sequential progress in traffic/sales cadence and category breadth. The non-merch momentum and same-day digital growth are credible offsets while merchandising resets take hold. The margin line fell, but mostly for reasons that are manageable and reversible (markdown normalization, targeted inventory actions, mix).

The risk/reward from here. Near term, the stock must digest the succession shock and prove that an insider can drive visible merchandising wins and store consistency. Medium term, the profit mix shift toward ads/membership/marketplace and same-day convenience provide cushion, while tariff mitigation and category refreshes can rebuild gross margin. Execution will be judged quarter by quarter: traffic trajectory, merchandising newness, digital unit economics, and ad/media growth.

Bottom line. The quarter modestly beat and the outlook held—results exceeded low expectations—but the CEO decision dominated the narrative. If Fiddelke can quickly show tangible merchandising improvements and steadier in-store execution, today’s selloff could mark capitulation on “external hero” hopes rather than a verdict on fundamentals. Until then, Target remains a self-help story with improving but unproven momentum, leaning on cost discipline and non-merch engines while it fights to win back trips and share.