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Target (TGT -3%) is heading lower after reporting Q1 (Apr) results. Target missed by a good amount on EPS due to margin pressure. Target has now reported two large EPS misses in the last three quarters. Revenue fell 2.8% yr/yr to $23.85 bln, which was also light of expectations. TGT lowered its FY26 adjusted EPS guidance quite substantially to $7.00-9.00 from $8.80-9.80. It also lowered FY26 sales guidance to a low-single digit decline from +1%.

• Same store comps for Q1 came in at -3.8% (in-store -5.7%; digital +4.7%), a notable drop off from Q4's +1.5% (in-store -0.5%; digital +8.7%). Comps were impacted by traffic -2.4% and average ticket -1.4%. The Q1 comp was disappointing considering that Target was lapping a weak -3.7% comp in the year ago period.
• Target described Q1 as an exceptionally challenging environment with declines in both traffic and sales, most notably in its discretionary categories. For several years now, Target has seen pressure in its discretionary categories as spending has declined from elevated levels during the pandemic and then moved further down in the face of historically high inflation. Target is dealing with declining consumer confidence and uncertainty regarding tariffs.
• In response, Target is beefing up its value offering this summer by offering more than 10,000 new items starting at just $1 in its popular Bullseye's Playground at the front of the store where items are priced at $1, $3 and $5. Target is expanding this assortment to include trending snacks and beverages.
• On its Q4 call, Target did not guide for Q1 operating margin, but prepared investors for a big margin decline due to consumer uncertainty. That turned out to be the case with adjusted operating margin falling to 3.7% from 5.3% a year ago and 4.7% in Q4. Margins were impacted higher-than-expected markdowns offset partially by significant savings from lower inventory shrink and the benefit of cost efficiency and productivity efforts.
• For Q2 (Jul), Target expects headwinds to persist. This includes sales pressure, tariff impacts and some additional costs to adjust inventory. In the back half of the year, Target noted it will be lapping easier comparisons and expects to have inventory and receipt adjustment costs behind it. Based on lower sales for the full year, Target anticipates downward pressure on profitability with meaningful offsets from lower shrink and cost initiatives.

As we said in our preview, we had concerns about Q1, especially margins. And that turned out to be the case. Weak sales and higher-than-expected markdowns pressured margins. And it sounds like its business will remain weak in Q2. We would be cautious with Target in the near term given all the headwinds. A big thing hurting Target is that it has higher exposure to discretionary categories while Walmart (WMT) generates the majority of its sales from groceries.