Inside Target's Q3 2025 10-Q: Sales Dip and Margins Squeeze

Retail giant Target has just released its financial results for the third quarter of 2025, providing a detailed look into its performance amid a challenging consumer environment. We've delved into their latest 10-Q filing with the SEC to break down the numbers and see what they tell us about the company's health and strategy.

For the three months ending November 1, 2025, Target reported total sales of $25.3 billion, a slight 1.5% decrease from the $25.7 billion generated in the same period last year. Let's explore how that revenue translated into profit.

The flow diagram below provides a visual breakdown of Target's income statement for the quarter, showing where the money came from and where it went.

Sales and Customer Behavior

A key metric for any retailer is comparable sales, which measures sales growth from existing stores and digital channels, filtering out the effect of new store openings. Target saw its comparable sales decline by 2.7%. This dip was driven by two factors: a 2.2% decrease in customer traffic and a 0.5% decrease in the average amount customers spent per transaction.

Interestingly, the sales channels tell different stories. While sales originating from physical stores fell by 3.8%, digitally-originated sales continued to grow, posting a 2.4% increase. This highlights the ongoing, though moderating, consumer shift towards online shopping.

Looking at what people are buying, essentials are leading the way. The Food & beverage category grew to 24% of merchandise sales, up from 23% a year ago. In contrast, more discretionary categories like Home furnishings & décor and Household essentials saw their share of the sales pie shrink slightly, suggesting consumers are prioritizing needs over wants.

A Squeeze on Profitability

While sales saw a modest decline, the impact on profitability was more pronounced. Target's operating income for the quarter was $948 million, a significant 18.9% drop from the $1.2 billion earned in the prior year. This caused the company's operating margin to shrink from 4.6% to 3.8%.

So, what caused this pressure?

• Gross Margin: The company’s gross margin rate, which is the percentage of revenue left after accounting for the cost of goods sold, remained relatively stable at 28.2% versus 28.3% last year. The filing notes that higher markdowns were mostly offset by lower inventory shrinkage and growth in other revenue sources like advertising.
• Operating Expenses: Selling, General, and Administrative (SG&A) expenses rose by 1.4% to $5.5 billion. When sales decline, even a small increase in fixed costs can squeeze profit margins, which is what happened here, with the SG&A rate climbing from 21.3% to 21.9% of sales.

Ultimately, Target’s net earnings (the bottom line) fell to $689 million from $854 million in the same quarter last year. This resulted in a diluted earnings per share (EPS) of $1.51, down from $1.85. The company also highlighted an "Adjusted EPS" of $1.78, which excludes $161 million in one-time costs related to business transformation initiatives.

Capital and Outlook

Target continues to return capital to its shareholders. During the quarter, the company spent $152 million to repurchase 1.7 million shares of its stock and paid out dividends. On the balance sheet, inventory levels stood at $14.9 billion, down from $15.2 billion a year ago, indicating disciplined management ahead of the crucial holiday season.

In conclusion, Target's third-quarter results paint a picture of a retailer navigating a tough market. While declining customer traffic and sales are putting pressure on profits, the company is benefiting from growth in its digital channels and a consumer focus on everyday essentials. The stable gross margin suggests effective cost control, but the dip in operating income shows that managing expenses in a lower-sales environment remains a key challenge for Target and the broader retail industry.