Fitch alters Target’s outlook to negative, maintains ’A’ IDR

Investing.com -- On Wednesday, June 4, 2025, Fitch Ratings revised the Rating Outlook of Target Corporation (NYSE:TGT) from Stable to Negative, while affirming the existing ratings. The ratings affirmed include the Long-Term Issuer Default Rating (IDR) at ’A’, Short-Term IDR and Commercial Paper ratings at ’F1’, and unsecured debt at ’A’.

This change in outlook has been influenced by Target’s recent operational missteps in the challenging retail industry, which have led to a decline in market share and profitability. Fitch anticipates a decrease in EBITDA by over 10% to less than $8 billion in 2025, which could lead to EBITDAR leverage nearing 2.5x. A possible revision to a Stable Outlook could be supported by improved sales trends and a reduction in leverage to 2.0x.

Despite the recent challenges, Target’s ratings reflect the company’s strong position in the U.S. market, its well-recognized brand, solid cash flow generation, and Fitch’s long-term expectations of low-single digit revenue, and EBITDA growth.

Target’s operating results have been unstable due to external challenges and internal missteps. Fitch projects a 15% EBITDA decline to $7.4 billion from 2024 on approximately $103 billion in revenue, given the pressure on discretionary categories like apparel and home, and some cost inflation from changing tariff policies.

In response to these challenges, Target has formed a new enterprise acceleration team to enhance operational agility and aims to regain market share through better merchandising and omnichannel improvements.

Target’s past operational success was due to its strong market positioning and long-term execution. Fitch believes Target’s success in reducing price perception concerns by reducing prices and expanding service offerings compared to direct competitors, demonstrates the strength of its market positioning.

Target’s recent success can also be attributed to its omnichannel initiatives, which increased digitally originated revenue penetration to about 20% in 2024 from 9% in 2019.

Fitch expects Target can grow EBITDA in the low single digits over time. Fitch’s long-term 2%-3% topline forecast compares with Target’s 4% revenue growth goal, largely comprised of positive comps and modest contribution from new units.

Annual FCF (after dividends) is projected to be near breakeven in 2025 given operating challenges but rebound to over $500 million beginning in 2026, down from $2.24 billion in 2024, largely due to higher capex assumptions of $4 billion.

Target’s EBITDAR leverage has been above 2.0x since 2022, when a combination of operating challenges and debt issuances caused leverage to climb to 2.7x from 1.3x in 2021 and a pre-pandemic average near 1.8x. EBITDAR leverage was 2.1x in 2023 and 2024 on EBITDA growth but could climb toward 2.5x in 2025.

Target’s ’A’ Long-Term IDR reflects its strong U.S. market position, which results in long-term expectations of low-single-digit revenue and EBITDA growth, and good cash flow.

A downgrade to ’A-’ could result from weak operating results, comps consistently under 2%, which would indicate market share losses, or EBITDA sustained in the mid-$7 billion range, which, in combination with financial policy decisions, could yield EBITDAR leverage sustained above 2.0x.

A revision of Target’s Outlook to Stable would result from sustained positive 2% to 3% market share, margin expansion, driving EBITDA toward $9 billion and EBITDAR leverage at or below 2.0x.

An upgrade to ’A+’ would result from consistently strong operating momentum and a commitment to maintain total EBITDAR leverage close to 1.5x.

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