Target Q1 Sales Beat Hides a Faster Story in Roundel Ads

Last year, Target’s first-quarter comparable sales fell 3.8 percent. This year, they rose 5.6 percent, the first positive comp in five quarters, on net sales of $25.4 billion that ran 6.7 percent ahead of last year and cleared the Street’s $24.64 billion model by roughly $800 million. Adjusted earnings per share of $1.71 came in 25 cents above the $1.46 analysts had been carrying.

The headline is the comp swing. The number under it is the one that will matter for the rest of the year: non-merchandise revenue, the slice of Target’s profit-and-loss statement that runs on Roundel ad sales and Target Circle 360 membership fees, grew almost 25 percent and helped lift gross margin 80 basis points.

A Comp Number Nobody on the Street Modeled

Wall Street had penciled Target for low-single-digit sales growth and an EPS print in the mid-$1.40s. The retailer delivered 5.6 percent comparable sales growth, with traffic up 4.4 percent and the average ticket up 1.1 percent. All six of Target’s core merchandising categories grew over the prior year.

The mix inside that comp is unusual. Stores-originated comparable sales rose 4.7 percent, a sharp reversal from the 5.7 percent decline a year ago. Digitally originated comparable sales climbed 8.9 percent, with same-day delivery powered by Target Circle 360 growing more than 27 percent on its own.

Hardlines, the company’s internal name for the toys, electronics, sports, and seasonal aisles now branded as Fun 101, rose to $3.52 billion, up 14.6 percent. Beauty sales grew 9.6 percent to $3.40 billion. Food and beverage gained 6.1 percent to $6.26 billion. Household essentials added 4.9 percent. Apparel and accessories grew 3.6 percent. Home furnishings and décor were essentially flat at $3.24 billion, the one category still working through its slump.

The detail that surprised analysts was breadth. A comp built on one category snapping back is fragile. A comp built on six categories all printing positive numbers, with the toys aisle leading at double digits, is the kind of read that pushes models up not just for the quarter but for the year.

Roundel Quietly Outpaced Every Merchandise Aisle

Strip out the merchandise sales and look at the line below it. Non-merchandise revenue, $549 million in the quarter, grew 24.6 percent over the prior year. The single biggest contributor was Target’s Roundel retail-media business, where ad revenue jumped to $246 million from $163 million, a gain of 51 percent.

That growth rate has no peer inside the company. Even Fun 101, the strongest merchandise category, grew at less than a third of Roundel’s pace. The mix shift is small in absolute dollars but heavy in margin, because retail-media revenue carries very different unit economics than selling laundry pods.

The category breakdown shows where the quarter’s dollars came from.

Gross margin landed at 29.0 percent, up from 28.2 percent a year ago. Management attributed the eighty-basis-point gain to three things, in order: better productivity in supply-chain facilities, growth in advertising and other non-merchandise revenues, and lower markdown rates. The middle item is doing a lot of work. Target executives have told investors they see a path to double Roundel’s value contribution over five years, with the unit already generating close to $2 billion in combined ad sales and cost offsets.

Fiddelke’s Opening Quarter in the Chair

Michael Fiddelke, who became chief executive officer earlier this year after a long run as chief operating officer and chief financial officer, used his first earnings call to frame the result as early validation, not a victory lap.

First quarter financial results were stronger than expected, providing encouraging early signs that our clarified strategy is resonating with our guests and driving broad-based growth across our business.

That was Fiddelke in Target’s first-quarter earnings release on May 20. He paired it with a more cautious read of where the company stands, telling investors the focus is on “building consistent, long-term growth” and that there is “much more work in front of us.”

The unusual part of his message was the explicit reference to capital discipline alongside a willingness to spend. Target’s plan, in his framing, is to stay flexible against an uncertain operating environment while continuing to invest in stores, team-member training, and what executives called an elevated guest experience. The investment side of that promise showed up in the quarter’s spending lines.

The Cost Side That Bit Back

For all the topline strength, the operating-margin line was 4.5 percent, exactly equal to the prior year’s adjusted operating margin of 3.7 percent plus the eighty-basis-point margin lift carried higher by the non-merchandise mix. Adjusted operating income of $1.135 billion grew 29 percent over the prior-year adjusted figure of $879 million.

The reason the margin did not gain more, given the gross-margin lift, is the selling, general and administrative (SG&A, the company’s overhead-and-store-payroll line) rate. SG&A landed at 21.9 percent of sales, twenty basis points above last year’s adjusted rate of 21.7 percent.

Four cost lines explain why the leverage from a 6.7 percent topline did not flow further down.

• Field-team compensation rose on additional store hours and training as Target staffed up to support the digital-fulfillment mix.
• Capital expenditures hit $1.04 billion, up 31 percent from $790 million last year, driven by new stores and remodels.
• Incentive compensation accruals climbed as the company tracked toward higher bonus targets.
• Marketing spend increased to support the digital and same-day-delivery push.

The capital story is also where the share-repurchase line went dark. Target paid $516 million in dividends, a slight rise on a 1.8 percent per-share dividend increase, and bought back zero stock in the quarter. The company still has about $8.3 billion of authorization remaining under the August 2021 repurchase program, money it has chosen to hold while capex steps up.

The cleanest read on whether that capital is working is return on invested capital. Trailing-twelve-month after-tax ROIC fell to 12.4 percent from 15.1 percent a year ago. The bulk of the decline is the absence of the prior year’s $441 million after-tax interchange-fee settlement gain, but business-transformation costs trimmed another 0.6 percentage points off the figure. Either way, Target is spending more capital to grow each dollar of revenue than it was two years ago.

The Raise: Why Guidance Climbed Two Points

The strongest signal from the quarter was the change in tone on the full-year guide. Target lifted its 2026 net-sales-growth expectation to a range around 4 percent, two full percentage points above the prior outlook of around 2 percent. Management said it now expects net sales to grow in every quarter of the year.

The operating-margin guide moved with it. The company expects 2026 operating margin to land more than twenty basis points above last year’s adjusted operating margin rate of 4.6 percent. That would push the full-year rate above 4.8 percent, a level Target last cleared cleanly in fiscal 2023 before the post-pandemic discretionary collapse hit.

Earnings per share guidance was nudged to “near the high end” of the prior $7.50 to $8.50 range. Management explicitly noted that the figure excludes any impact from tariff refunds, a hedge that suggests the company is keeping room on the high side without committing to it.

The carve-out matters. Target imports a heavy share of its hardlines, home, and apparel assortment from Asia, and the back-half tariff picture remains uncertain. By leaving the tariff-refund variable outside the guide, the company is signaling that whatever happens with that line item will be upside or downside to a baseline the operating business already supports.

The Read-Through for Walmart and Amazon

Target’s quarter does not happen in a vacuum. Walmart reported its own first quarter last week with US comp sales of 4.5 percent and continued share gains in grocery. Amazon’s retail segment posted high-single-digit growth in North America. Target’s 5.6 percent comp slots between the two, the first time in roughly two years it has done so.

The Roundel growth rate is the more competitive number. Amazon’s ad business posted year-over-year growth in the high teens last quarter. Walmart Connect grew in the mid-twenties. Roundel’s 51 percent gain, off a smaller base, is the fastest growth among the three major US retail-media platforms in the most recent comparable quarter, according to Digiday’s running tally of retail-media disclosures.

That growth rate will normalize. The comparable will get harder in the back half as Q3 and Q4 of last year already carried meaningful Roundel scale. The question Target’s investors will be modeling between now and August is whether the merchandise comp can hold even half its current pace once the easier prior-year compares roll off.

If the non-merchandise mix continues to lift gross margins as comp compares get harder in the third quarter, Target’s operating-margin guide has a real shot at clearing the top end of the implied range. If the merchandise comp fades and Roundel growth slows in tandem, the elevated cost base will look heavy against a flatter topline, and the unused $8.3 billion of buyback authorization will start looking less like discipline and more like hesitation.