TARGET CORP (TGT)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Financial Summary

First quarter 2026 included the following:

•Net Sales of $25.4 billion, an increase of 6.7 percent from the comparable prior-year period, driven by:

•A comparable sales increase of 5.6 percent, reflecting a 4.4 percent increase in traffic and a 1.1 percent increase in average transaction amount;

•The sales contribution from new stores; and

•Non-merchandise sales growth of 24.6 percent, primarily driven by growth in our Roundel digital advertising business offering.

•GAAP and Adjusted operating income1 of $1.1 billion was 22.9 percent lower than prior year GAAP operating income, which included $593 million of pretax net gains on interchange fee settlements. Excluding the settlement gains, Adjusted operating income was 29.1 percent higher than $0.9 billion in the prior-year.

Note: Amounts may not foot due to rounding.

1Adjusted diluted earnings per share (Adjusted EPS) and Adjusted operating income, non-GAAP metrics, exclude the impact of certain items. Management believes that Adjusted EPS and Adjusted operating income are useful in providing period-to-period comparisons of the results of our operations. A reconciliation of non-GAAP financial measures to GAAP measures is provided on page 20.

We report after-tax return on invested capital (ROIC) because we believe ROIC provides a meaningful measure of our capital allocation effectiveness over time. For the trailing twelve months ended May 2, 2026, after-tax ROIC was 12.4 percent, compared with 15.1 percent for the trailing twelve months ended May 3, 2025. The calculation of ROIC is provided on page 21.

Business Environment

Beginning in 2025, the U.S. imposed additional tariffs on a wide range of imported products using various legal authorities, including the International Emergency Economic Powers Act (IEEPA). These tariffs were subsequently modified through incremental increases, decreases, pauses, and limited exemptions. Approximately one-half of the merchandise we offer is sourced from outside the U.S., either directly or through our vendors, with China as the single largest source of merchandise we import.

On February 20, 2026, the U.S. Supreme Court ruled that tariffs imposed under IEEPA were not authorized by the statute. While the ruling did not establish a refund process, the U.S. Court of International Trade (CIT) subsequently ordered U.S. Customs and Border Protection (CBP) to implement a process to administer refunds, which CBP began executing with the April 20, 2026 deployment of the Consolidated Administration and Processing of Entries (CAPE) system for certain IEEPA refund claims.

We incurred tariffs under IEEPA, and are following the established refund filing and validation process through the CAPE system, along with other importers seeking IEEPA refunds. As of May 2, 2026, no refunds had been received and no receivable was recorded. Subsequent to quarter-end, we began receiving refunds, which to date have not been material. Due to the remaining uncertainties related to the process, timing, and amount of potential refunds, as well as a potential appeal of the CIT's order to issue refunds, we are unable to estimate the ultimate financial effects of IEEPA refunds.

After the Supreme Court ruling in February, the U.S. administration instituted new tariffs against most major trading partners, and has previewed future actions that could restore or exceed the level of the IEEPA tariffs. We continue to assess and respond to the evolving consumer, legal and regulatory environment.

The collective interaction of tariffs, IEEPA refunds, sourcing strategies, pricing actions, consumer response and behaviors, and other factors could materially impact our sales, results of operations, and financial condition in future periods.

Business Transformation Initiatives

In 2025, we announced a multi-year initiative to transform various aspects of our business—including our organizational structure, processes, and technology—to enable greater agility and optimize the use of the Company's assets. We incurred costs and charges related to our business transformation initiatives in 2025, including a reduction in our headquarters workforce. Refer to Note 7 to the Financial Statements in our Form 10-K for the fiscal year ended January 31, 2026, for additional information.

We did not incur any costs or charges related to these initiatives during the three months ended May 2, 2026, or the comparable prior-year period.

We may incur additional costs and charges related to these initiatives in future periods, which may adversely affect our results of operations and financial condition; however, we cannot reasonably estimate the amount or timing of such costs and charges.

Analysis of Results of Operations

Note: Gross margin (GM) is calculated as Net Sales less Cost of Sales. All rates are calculated by dividing the applicable amount by Net Sales.

(a)Adjusted SG&A expenses, Adjusted SG&A expense rate, Adjusted operating income, and Adjusted operating income margin rate, which are non-GAAP measures, exclude the impact of certain items. Management believes that these measures are useful in providing period-to-period comparisons of the results of our operations. A reconciliation of non-GAAP financial measures to GAAP measures is provided on page 20.

Net Sales

Net sales includes all Merchandise Sales and revenues from other sources, most notably advertising revenue and credit card profit-sharing income.

Merchandise Sales are net of expected returns, and our estimate of gift card breakage. Comparable sales include all Merchandise Sales, except sales from stores open less than 13 months or that have been closed. We use comparable sales to evaluate the performance of our stores and digital channels by measuring the change in sales for a period over the comparable, prior-year period of equivalent length. Comparable sales measures vary across the retail industry. As a result, our comparable sales calculation is not necessarily comparable to similarly titled measures reported by other companies. Digitally originated sales include all Merchandise Sales initiated through mobile/computer applications and our websites. Our stores fulfill the majority of digitally originated sales, including shipment from stores to guests, store Order Pickup or Drive Up, and Same Day Delivery. Digitally originated sales may also be fulfilled through our distribution centers, our vendors, or other third parties.

Merchandise Sales growth—from both comparable sales and new stores—represents an important driver of our long-term profitability. We expect that comparable sales growth will drive a significant portion of our total sales growth. We believe that our ability to successfully differentiate our guests’ shopping experience through a careful combination of merchandise assortment, price, convenience, guest experience, and other factors will over the long-term drive both increasing shopping frequency (number of transactions, or "traffic") and the amount spent each visit (average transaction amount).

Note: Merchandise Sales fulfilled by stores include in-store purchases and digitally originated sales fulfilled by shipping merchandise from stores to guests, Order Pickup, Drive Up, and Same Day Delivery.

Note 2 to the Financial Statements provides additional product category sales information. The collective interaction of a broad array of macroeconomic, competitive, and consumer behavioral factors, as well as sales mix and the transfer of sales to new stores, makes further analysis of sales metrics infeasible.

Store Data

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Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations

Executive Overview

In 2025, we operated in a dynamic and uncertain environment characterized by cautious consumers who remained value-focused and selective in discretionary spending along with unprecedented tariff volatility.

Against this backdrop, we took decisive actions to strengthen our business and position Target for long-term growth with a clear strategic focus around four priorities: leading with merchandising authority; elevating the guest experience; accelerating technology; and strengthening team and communities. During 2025, we:

•Took action on our initiative to transform various aspects of our business, including organizational simplification to streamline decision-making, reduce complexity, and drive efficiency;

•Advanced the multi-year transformation of our Hardlines business into "Fun 101", an evolution in bringing greater cultural relevance and style authority to the assortment;

•Continued innovation within our owned brands portfolio, including design partnerships and collaborations across multiple categories, such as our new fresh floral owned brand, Good Little Garden, the kate spade new york x Target collection, and partnerships with celebrities including Taylor Swift and Tom Holland;

•Launched Precision Plus by Roundel™, a retail media capability that improves advertising outcomes by leveraging data and AI-learning, and expanded our Target Plus third-party digital marketplace;

•Leveraged our nearly 2,000-store network (including 18 new stores opened in 2025) to fulfill the vast majority of sales through stores, supporting speed and cost efficiency, with two-thirds of digital sales fulfilled through our same-day fulfillment options;

•Realized significant improvements in inventory shrink throughout the year, with shrink rates reaching pre-pandemic levels;

•Enhanced artificial intelligence capabilities across merchandising, planning, inventory management, and personalization, and expanded the use of AI-powered tools to simplify work for store and headquarters teams; and

•Continued our longstanding commitment to community engagement and giving, including giving 5 percent of profit to communities, as well as over 1 million team member volunteer hours annually.

Business Environment

Beginning in 2025, the U.S. imposed a variety of additional tariffs on a wide range of imported products using various legal authorities, including IEEPA. Those additional tariffs were subsequently modified through incremental increases, decreases, pauses, and limited exemptions. Approximately one-half of the merchandise we offer is sourced from outside the U.S., either directly or through our vendors, with China as the single largest source of merchandise we import.

On February 20, 2026, the U.S. Supreme Court ruled that tariffs imposed under IEEPA were not authorized by the statute. The ruling does not establish a refund process, and significant uncertainty remains regarding how and when any amounts may be recovered. We are evaluating the ruling and potential actions available to us. Because the process, timing, and amount of any recovery are uncertain, we are unable to estimate the financial effects, if any, at this time. The ultimate resolution of this matter could materially affect our consolidated financial position, results of operations, and cash flows.

We are closely monitoring the evolving consumer and regulatory landscape, including new tariffs announced in February 2026 in response to the U.S. Supreme Court ruling on IEEPA tariffs, and adjusting plans as needed. The collective interaction of tariffs, sourcing strategies, pricing actions, consumer response and behaviors, and other factors, could materially impact our sales and results of operations in future periods.

Business Transformation Initiatives

In 2025, we announced a multi-year initiative to transform various aspects of our business—including our organizational structure, processes, and technology—to enable greater agility and optimize the use of the Company's assets. We incurred costs and charges related to our business transformation initiatives in 2025, including a reduction in our headquarters workforce. Note 7 to the Financial Statements provides additional information.

We may incur additional business transformation costs and charges in future periods, which may adversely affect our results of operations and financial condition; however, we cannot reasonably estimate the amount of such costs and charges at this time.

Financial Summary

Fiscal 2025 included the following notable items:

•GAAP diluted earnings per share were $8.13 and Adjusted EPS1 were $7.57.

•Net Sales were $104.8 billion, a decrease of $1.8 billion, or 1.7 percent, from the prior year.

•Comparable sales decreased 2.6 percent, driven by a 2.2 percent decrease in traffic and a 0.4 percent decrease in average transaction amount.

•Operating income of $5.1 billion and Adjusted operating income1 of $4.8 billion were 8.1 percent and 14.2 percent lower, respectively, than the prior-year.

•We recognized $593 million of net gains related to settlements of credit card interchange fee litigation matters.

•We incurred $250 million of costs related to business transformation initiatives.

Note: Amounts may not foot due to rounding.

1Adjusted diluted earnings per share (Adjusted EPS) and Adjusted operating income, non-GAAP metrics, exclude the impact of certain items. Management believes that Adjusted EPS and Adjusted operating income are useful in providing period-to-period comparisons of the results of our operations. A reconciliation of non-GAAP financial measures to GAAP measures is provided on page 32.

(a)2023 consisted of 53 weeks compared with 52 weeks in 2025 and 2024.

We report after-tax return on invested capital (ROIC) because we believe ROIC provides a meaningful measure of our capital allocation effectiveness over time. For the trailing twelve months ended January 31, 2026, after-tax ROIC was 13.8 percent, compared to 15.4 percent for the trailing twelve months ended February 1, 2025. The calculation of ROIC is provided on page 34.

Analysis of Results of Operations

Note: Gross margin is calculated as Net Sales less Cost of Sales. All rates are calculated by dividing the applicable amount by Net Sales.

(a)2023 consisted of 53 weeks compared with 52 weeks in 2025 and 2024.

(b)Adjusted SG&A expenses, Adjusted SG&A expense rate, Adjusted operating income, and Adjusted operating income margin rate, which are non-GAAP measures, exclude the impact of certain items. Management believes that these measures are useful in providing period-to-period comparisons of the results of our operations. A reconciliation of non-GAAP financial measures to GAAP measures is provided on page 32.

A discussion regarding Analysis of Results of Operations and Analysis of Financial Condition for 2024, as compared to 2023, is included in Part II, Item 7, MD&A to our Annual Report on Form 10-K for the year ended February 1, 2025.

Net Sales

Net Sales includes Merchandise Sales and revenues from other sources, most notably advertising revenue and credit card profit-sharing income. Note 2 to the Financial Statements provides more information.

Merchandise Sales are net of expected returns, and our estimate of gift card breakage. Note 2 to the Financial Statements defines gift card "breakage." We use comparable sales to evaluate the performance of our stores and digital channels by measuring the change in sales for a period over the comparable, prior-year period of equivalent length. Comparable sales include all Merchandise Sales, except sales from stores open less than 13 months or that have been closed. Comparable sales measures vary across the retail industry. As a result, our comparable sales calculation is not necessarily comparable to similarly titled measures reported by other companies. Digitally originated sales include all Merchandise Sales initiated through mobile/computer applications and our websites. Our stores fulfill the majority of digitally originated sales, including shipment from stores to guests, store Order Pickup or Drive Up, and Same-Day Delivery. Digitally originated sales may also be fulfilled through our distribution centers, our vendors, or other third parties.

Merchandise Sales growth – from both comparable sales and new stores – represents an important driver of our long-term profitability. We expect that comparable sales growth will drive a significant portion of our total sales growth. We believe that our ability to successfully differentiate our guests’ shopping experience through a careful combination of merchandise assortment, price, convenience, guest experience, and other factors will over the long-term drive both increasing shopping frequency (number of transactions, or "traffic") and the amount spent each visit (average transaction amount).

The extra week in 2023 contributed $1.7 billion to Net Sales.

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