How The Retailer Lost The Customer Who Made It Profitable
Inside Today’s Issue
Essay: Target’s Tariff Refund Isn’t A Turnaround
Evaporating Dividend Yields
Down Days For Walmart
How Bessent Played With Bond Yields
Chart Of The Day… Veeva Systems (VEEV)
Today’s Mailbag
Last September, I explained why I think Target (TGT) will end up in bankruptcy within five to seven years. Since then the stock is up 85% – which in the minds of most readers will surely lead to the conclusion that I am wrong. But am I?
Here’s my thesis.
Target was the premier retail shopping experience for roughly two decades. The “Target run” was a weekend habit for many middle-class and upper-middle-class consumers. Target combined outstanding retailing with competitive prices, which won it a higher operating margin than other retailers. Those profits powered its constant expansion and brand marketing, which created a valuable national brand. For a very long time, this was more than good enough to hold off competitive threats from Costco Wholesale (COST), Walmart (WMT), and Amazon (AMZN). But, at the heart of Target’s success was an elevated, in-person shopping experience.
Then COVID happened.
Consumers’ shopping habits changed… dramatically. Upper-middle-class customers stopped coming to the store, at first because of masks and now because delivery apps save so much time. Additionally, in many areas, Target’s stores became rundown and filled with both low-class employees and low-class customers. As traffic fell, margins collapsed.
The shopping app trend continues: DoorDash grew revenue 35.6% in its June quarter, to $4.45 billion from $3.28 billion. Instacart grew 14.1%, to $1.04 billion from $914 million. The affluent household now pays a fee to avoid going to Target.
Target lost the customer who made it profitable.
Key stats from Target’s fiscal 2021 peak to its lows in fiscal 2025:
Revenue: $106.0 billion to $104.8 billion, down 1.2% in nominal dollars across four years of inflation
Operating income: $8.95 billion to $5.12 billion, down 42.8%
Operating margin: 8.4% to 4.9%
Diluted earnings per share: $14.10 to $8.13, down 42.3%
Free cash flow after capital spending: $5.08 billion to $2.83 billion
The company’s product mix also demonstrates this key demographic shift in its customer base. Since 2022 (full fiscal year 2022 vs fiscal year 2026):
Home furnishing and décor: $20.3 billion to $15.6 billion, down 22.9%
Hardlines: $18.6 billion to $15.8 billion, down 15.1%
Apparel and accessories: $17.9 billion to $15.7 billion, down 12.2%
Food and beverage: $20.3 billion to $24.1 billion, up 18.9%
Target replaced its highest-margin customers with people looking for cheap groceries.
But that’s not what today’s headlines claim. The company reports that operating margins have soared – jumping from 5.2% to 9.6% in the latest quarter.
When I saw those headlines, I laughed. There’s no way to increase operating margins when you’re in the middle of a turnaround that requires you to vastly improve the shopping experience while lowering prices. Target is spending heavily to improve its stores and it’s lowering its prices. How could margins improve?
Target received $994 million of refunds on tariffs last quarter. Getting a billion dollars certainly helps! The company chose to book this income as a reduction of cost of sales. Cost of goods sold therefore fell 1.7% while sales rose 5.3%, in part because of inflation.
