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Target (TGT +12%) is surging after reporting impressive Q2 (Jul) results. Last quarter, Target broke its string of five consecutive quarters of reporting huge EPS beats, but it's back on track with a big EPS beat in Q2. Revenue rose 2.7% yr/yr to $25.45 bln, which was better than expected. The guidance was good as Target guided Q3 (Oct) EPS at $2.10-2.40, the mid-point of which was better than expected. Also, TGT raised its full year EPS outlook by a good amount.

• Same store comps for Q2 came in at +2.0% (in-store +0.7%; digital +8.7%), at the high end of +0-2% prior guidance. This marked its first positive comp after four declines. Traffic grew 3% yr/yr, with all six core merchandising categories delivering traffic growth. Same-day services saw double digit growth, led by low teens growth in Drive Up and Target Circle 360 same-day delivery.
• Importantly, TGT saw improving trends across its discretionary categories, most notably in apparel, where Target has incorporated new designs and value. Its All In Motion activewear brand delivered growth in the low-teens. Beauty was another standout with comp growth of +9% in Q2. Also, Food & Beverage and Essentials saw traffic growth as consumers responded to TGT's offerings in an environment where they're focused on value.
• Of note, its comp growth was driven entirely by traffic in stores and digital channels. Recall that in May, Target announced it would lower everyday regular prices on approximately 5,000 frequently shopped items. That helped drive traffic to its stores. Looking ahead, Target guided to Q3 comps of +0-2%. For the full year, the company reaffirmed comps of +0-2% but now believes the increase will more likely be in the lower half of that range.
• Operating margin in Q2 improved quite a bit to 6.4% from 4.8% a year ago and 5.3% in Q1. Margins were aided by merchandising activities, including cost improvements that more than offset higher promotional markdown rates, combined with favorable category mix. TGT is focused on continued margin expansion as it moves back towards and potentially beyond the 6% annual rate it was earning before the pandemic.
• In terms of the consumer, TGT said its view remains largely the same. Consumers have shown remarkable resilience in the face of multiple challenges. They continue to focus on value as they work hard to manage their household budgets. And while they continue to turn out and shop around holidays and other seasonal moments, many are delaying purchases until the moment of need.

Overall, we think investors are reacting to Target's large EPS beat and impressive operating margin expansion. Also, TGT finally returned to positive comps after several negative comps. Another big positive was Target being notably more bullish on consumer discretionary categories. As we have mentioned several times, Target has much higher exposure to discretionary categories than Walmart (WMT). In FY24, roughly 60% of Walmart US sales were groceries while 26% were general merchandise. Contrast that with Target, which is 23% Food & Beverage. On this morning's call, TGT said trends in discretionary categories have improved significantly, which is music to investors' ears.