Target earnings upside underestimated on margin recovery, Jefferies says

Target Corp (NYSE: TGT) may have more earnings upside ahead than the market is currently pricing in, according to a new note from Jefferies analysts. The firm argues that the retailer’s recovery narrative is being overly focused on sales trends rather than profitability improvements.

Recovery story: margins, not just sales

Jefferies said the current market view of Target centers on a slow recovery in comparable sales, supported by easier year-on-year comparisons. The analysts believe this framing misses what they see as the primary driver of future performance: margins.

“We think TGT's recovery is being misread as just a traffic story on easy compares, when in reality, the real upside here is margin‑led,” the analysts wrote.

Jefferies forecasts: EPS growth outpacing sales

Jefferies forecasts Target’s EPS to grow about 7.6% in 2026 versus 2.3% sales growth. The firm said this is above consensus expectations of 5.5% EPS growth and 1.9% sales growth.

The analysts also argue the market is underestimating the degree of operating leverage in the business, stating they expect EPS to grow by greater than 3x net sales in 2026.

Potential drivers: product mix normalization and markdown discipline

A key part of the thesis is a potential normalization in product mix. Jefferies said Target’s sales have tilted toward food and household essentials in recent years, while higher-margin discretionary categories such as apparel and home goods have lagged.

The analysts suggest that management’s renewed merchandising focus could gradually restore balance. They noted that even a partial mix shift toward discretionary products could lift gross margins without requiring a strong rebound in traffic.

Jefferies also highlighted markdown discipline. The firm pointed to past execution challenges, including inconsistent inventory levels, assortment clutter, and weaker sell-through, which it said have contributed to higher discounting. It argued that operational improvements—such as cleaner assortments and better in-store execution—could reduce the need for markdowns.

“Even modest markdown improvement would translate into a disproportionate lift in GP and cleaner working capital,” the analysts wrote.

Operating leverage and gross margin flow-through

The report emphasizes operating leverage, noting that Target’s cost structure is described as highly fixed below the gross margin line. Jefferies estimated that a roughly 60 basis point improvement in gross margin could add about $400 million in gross profit and around $1 in EPS, highlighting what it sees as meaningful flow-through potential.

Impact and outlook

While acknowledging ongoing cost pressures from areas such as wages and fuel, Jefferies said incremental investment in store labor could support better product availability and stronger full-price sales. The firm argued this could help offset some near-term cost headwinds while improving overall execution.

“The debate is shifting from whether comps turn positive to how quickly the profit and loss (P&L) normalizes once they do, and that is where we see the most upside,” the analysts concluded.

Target shares traded at about $123 on Wednesday afternoon, up more than 25% so far this year.