On March 5 Target Corp. (TGT) reported impressive Q4 results, beating both revenue and profit estimates. The retailer apparently faces numerous headwinds as consumers clearly prioritize staples (food and drink) over discretionary spending.

In response, TGT streamlined operations and adjusted inventory to better adapt to the new reality. As a result, the stock began to recover, rising 10% so far this year. All in all, TGT reported a strong 158% rise in Q4 earnings per share (EPS) to $2.98, handily beating estimates of $2.35. The company's total comparable sales, however, fell 4.4%, with in-store comparisons down 5.4% and digital like-to-likes down 0.7%. Still, the results were in line with expectations: traffic fell 1.7% YoY, an improvement from the 4.1% decline in Q3.

On the positive side, the operating margin expanded by 215 basis points to 5.8%, driven by a gross margin expansion of around 290 basis points to 25.6%, primarily due to lower markdowns, cuts in freight costs and supply chain logistics, as well as in digital fulfillment costs, combined with an improving product mix. The total SG&A ratio deleveraged by around 80 basis points to 20.8% — again, mainly due to softer sales and higher labor costs.

Furthermore, inventory ended the year in a rather solid position, down 11.9% compared to sales growth of 1.7%, which should help profitability going forward. Overall, Q4 was better than expected, reflecting improving execution in a challenging environment.

As to Target’s own guidance, for Q1 2024, Target expects EPS to be between $1.70 and $2.10, with a comps of (-3.0%) to (-5.0%). The outlook likely reflects a slower start to the quarter due to difficult consumer spending trends, especially for discretionary items. For the full year, Target expects EPS of $8.60 to $9.60, with a comp of 0.0% to 2.0%.