Target’s improving sales trends are giving investors more reason to believe the retailer’s turnaround is taking hold, but Bank of America still sees a difficult setup for the stock heading into second-quarter earnings.
Target (TGT) is scheduled to report results on Aug. 19, and expectations have climbed since its better-than-expected first quarter. The retailer posted 6.7% net sales growth and a 5.6% increase in comparable sales in the period, while adjusted earnings per share rose to $1.71 from $1.30 a year earlier.
That momentum prompted Target to raise its full-year sales outlook in May. Management now expects net sales growth of around 4% and adjusted EPS near the high end of its previous $7.50 to $8.50 range.
Bank of America sees more improvement coming in the second quarter, though the firm is less convinced the recent stock rally leaves enough upside for investors.
BofA raises Target estimates ahead of earnings
In a note shared with TheStreet, BofA analysts said Target has shown an “impressive improvement” in sales under new leadership as broader consumer spending remains resilient.
The firm raised its second-quarter and full-year EPS estimates by roughly 3%, forecasting quarterly adjusted EPS of $2.34 and fiscal-year EPS of $8.84. BofA also expects Target’s comparable sales to rise 2.5% in the second quarter, slightly ahead of the 2.3% Visible Alpha consensus cited in the note.
Margins could provide another bright spot. BofA forecasts gross margin expansion of about 90 basis points, helped by an easier merchandise-margin comparison and less tariff pressure. That estimate is about 20 basis points better than consensus.
Those estimates come after Target’s first-quarter gross margin improved to 29% from 28.2% a year earlier. The company attributed the increase to improved supply-chain productivity, growth in advertising and other non-merchandise revenue, and lower markdown rates, partially offset by higher product costs.
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BofA still sees downside for Target stock
Stronger estimates did not change BofA’s broader view of the stock.
The firm reiterated its Underperform rating and raised its price objective to $124 from $110. With Target shares at $152.29 when the note was published, the new target still implied roughly 19% downside.
BofA said Target was trading at about 17 times its fiscal 2027 earnings estimate, up from roughly 14 times following first-quarter results. The analysts based their new price target on a 14-times multiple, which they said is roughly in line with Target’s historical valuation.
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The concern shifts to what happens after the near-term recovery. BofA estimates fiscal 2027 EPS of $8.46, which would represent about 4% growth as Target begins cycling stronger sales comparisons and loses some of the easier margin comparisons helping results now.
The analysts said an upside case could support roughly $10 in fiscal 2027 EPS and a 16-times multiple, but they also pointed to risks from a slower apparel and home recovery and tougher competition in food and beverages.
Target’s spending plans add another variable
Target is investing heavily to support its turnaround, which could put more pressure on expenses if sales momentum slows.
The company plans about $1 billion in incremental operating investment this year, including hundreds of millions of dollars for store payroll and training. Target is also increasing capital spending by more than $1 billion to roughly $5 billion, with investments aimed at new stores, remodels, technology, and supply-chain improvements.
BofA described those investments as the right move for the longer term, but warned that SG&A growth remains a wildcard. Target’s first-quarter adjusted SG&A rate already increased to 21.9% from 21.7% a year ago as higher compensation, training, marketing, and project-related spending offset some of the benefit from stronger sales.
That leaves Target entering earnings with a stronger business backdrop and a tougher stock setup. BofA has become more optimistic about the retailer’s operating recovery, but its $124 target suggests the firm believes investors may already be paying too much for that progress.
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