Target Corp. (NYSE:TGT)

The period under review demonstrates significant fluctuations in economic profit. Net operating profit after taxes (NOPAT) initially increased substantially, followed by a considerable decline, and then a partial recovery. The cost of capital remained relatively stable, with a slight increase in the earlier years before decreasing in the most recent period. Invested capital generally trended upward, though with some variation. These factors combined to produce a volatile pattern in economic profit.

Economic Profit Trend

Economic profit began at a negative value in 2020, indicating that returns did not cover the cost of capital employed. It turned positive in 2021 and experienced substantial growth in 2022, reaching a peak of US$3,049 million. However, economic profit declined sharply in 2023, returning to a negative value. This negative trend continued into 2024 and 2025, though the magnitude of the loss lessened slightly in the latter year.

NOPAT Performance

NOPAT increased from US$3,896 million in 2020 to US$5,024 million in 2021, representing a significant improvement in operational profitability. This growth continued to US$7,872 million in 2022. A substantial decrease was then observed in 2023, with NOPAT falling to US$3,821 million. NOPAT partially recovered in 2024 to US$4,953 million, but decreased again in 2025 to US$4,376 million.

Cost of Capital Analysis

The cost of capital increased from 14.87% in 2020 to 15.85% in 2021 and peaked at 16.00% in 2022. It then decreased to 15.28% in 2023 and 15.31% in 2024, before falling to 14.06% in 2025. This suggests a changing risk profile or financing environment over the period.

Invested Capital Observations

Invested capital increased from US$27,256 million in 2020 to US$30,495 million in 2021 and remained relatively stable at US$30,151 million in 2022. A slight increase was observed in 2023 to US$30,226 million, followed by more substantial growth in 2024 and 2025, reaching US$34,307 million and US$36,107 million respectively. This indicates ongoing investment in the business.

The interplay between NOPAT, cost of capital, and invested capital significantly impacted economic profit. The peak in economic profit in 2022 coincided with the highest NOPAT and a relatively high cost of capital. The subsequent decline in economic profit was driven by the substantial decrease in NOPAT, despite a slight decrease in the cost of capital, and continued investment in capital.

Net Earnings

The net earnings demonstrate significant variability over the observed periods. Starting at 3,281 million USD in 2020, earnings increased markedly to 4,368 million USD in 2021 and then exhibited a strong peak at 6,946 million USD in 2022. However, the subsequent years show a pronounced decline, with net earnings dropping to 2,780 million USD in 2023. Thereafter, earnings partially recovered to 4,138 million USD in 2024 and slightly decreased to 4,091 million USD in 2025. This trend suggests a period of robust profit growth culminating in 2022, followed by a sharp contraction and partial stabilization in the latest years.

Net Operating Profit After Taxes (NOPAT)

NOPAT follows a pattern somewhat aligned with net earnings but with some variation in magnitude. Beginning at 3,896 million USD in 2020, NOPAT increased steadily to 5,024 million USD in 2021 and then experienced a substantial rise to 7,872 million USD in 2022. This was followed by a notable decrease to 3,821 million USD in 2023. The value subsequently increased to 4,953 million USD in 2024, then declined again to 4,376 million USD in 2025. The pattern indicates that operational profitability reached its highest point in 2022 and then declined sharply in 2023, showing a moderate recovery but not reaching previous peak levels in the following years.

Summary of Trends

Both net earnings and NOPAT reveal a strong growth phase culminating in 2022, indicative of favorable business conditions or operational efficiencies. The significant declines in both metrics in 2023 point to potential challenges or adverse conditions impacting profitability in that period. The partial rebound in 2024 followed by stabilization or slight decline in 2025 indicates the firm is managing to recover from the downturn but has yet to regain peak profitability levels seen in 2022. Overall, the data reflect volatility in profitability with a cyclical peak and trough pattern over the six-year span.

Provision for Income Taxes

The provision for income taxes exhibited an overall upward trend from February 1, 2020, through January 29, 2022, increasing from $921 million to $1961 million. This represents a significant rise over the two-year span. Subsequently, there was a marked decline to $638 million as of January 28, 2023, after which the provision increased again, reaching approximately $1170 million by February 1, 2025. This fluctuation suggests variability in taxable income or changes in tax planning strategies over the years measured.

Cash Operating Taxes

Cash operating taxes showed considerable volatility throughout the period. Starting at $862 million in February 2020, the amount rose sharply to $1585 million by January 30, 2021, and remained relatively high at $1546 million in January 29, 2022. However, in the following year, there was a steep decline to $178 million in January 28, 2023. After this trough, cash operating taxes rebounded to $998 million in February 3, 2024, and further increased to $1474 million by February 1, 2025. These wide swings indicate fluctuations in actual tax outflows, possibly influenced by changes in taxable income, timing differences, or tax payments.

Comparative Insights

Both provision for income taxes and cash operating taxes showed similar patterns of rising sharply in the early years, reaching peaks around 2021-2022, followed by sharp declines in 2023, and then partial recoveries towards 2025. Notably, the cash operating taxes displayed greater volatility compared to provisions, suggesting possible timing mismatches or adjustments between accounting provisions and actual cash tax payments. The divergence in the magnitude of changes, particularly the sharp drop in cash operating taxes in 2023 compared to provisions, may reflect tax refunds, credits, or other operational factors affecting cash flows distinct from accounting accruals.

Total Reported Debt & Leases

The total reported debt and leases show a consistent upward trend across the periods, increasing from $13,974 million in early 2020 to $19,875 million by early 2025. This indicates a growing reliance on debt and lease obligations over the five-year span, with the most notable increases occurring between 2021 and 2023. The growth rate appears to moderate slightly towards the final years but remains at a high absolute level.

Shareholders’ Investment

Shareholders’ investment exhibits more fluctuation compared to debt levels. It initially rises from $11,833 million in 2020 to a peak of $14,440 million in 2021, followed by a decline through 2023 down to $11,232 million. After this trough, it rebounds significantly in 2024 and 2025, reaching $14,666 million. This pattern suggests periods of both contraction and expansion in shareholder equity, possibly reflecting profit retention, dividend policy changes, or equity financing activities during these years.

Invested Capital

Invested capital shows a general upward trajectory over the observed time frame. Beginning at $27,256 million in 2020, it increases steadily with a slight dip only in 2022, remaining around $30,000 million before accelerating growth to $36,107 million by 2025. The growth in invested capital aligns with the increasing debt levels and mostly recovering shareholders’ investment, indicating an overall expansion in the company’s capital base.

Overall Analysis

The financial data depicts a company increasing its capital base primarily through rising debt while shareholders’ equity shows variability. The growing total invested capital alongside increasing debt suggests that the company may be financing growth or operations with a heavier reliance on debt instruments. The variable equity levels imply possible fluctuations in earnings retention or capital structure adjustments. This pattern of rising debt and invested capital coupled with equity variability may have implications for financial leverage and risk profile over the reported years.

The economic spread ratio exhibited significant fluctuations over the observed period. Initially negative, it demonstrated substantial improvement before declining again in subsequent years. A review of the figures reveals a complex performance pattern requiring further investigation.

Economic Spread Ratio Trend

The economic spread ratio began at -0.58% in February 2020, indicating that the company’s return on invested capital was less than its cost of capital. A marked improvement occurred in January 2021, with the ratio rising to 0.62%, signifying a positive economic spread. This positive trend continued, peaking at 10.11% in January 2022, representing a substantial value creation period. However, the ratio then decreased sharply to -2.64% in January 2023, and continued to decline, reaching -1.94% in February 2025.

The economic spread ratio’s volatility suggests sensitivity to underlying economic conditions or company-specific factors. The peak in 2022 warrants further analysis to identify the drivers of this performance. The subsequent declines, particularly the return to negative values in 2023 and beyond, indicate a weakening in the company’s ability to generate returns exceeding its cost of capital.

Relationship to Economic Profit

The economic spread ratio’s movements correlate with the economic profit figures. The positive economic spread in 2021 and 2022 coincided with positive economic profit. Conversely, the negative economic spread in 2020, 2023, 2024, and 2025 aligned with negative economic profit. This relationship confirms that the economic spread ratio accurately reflects the company’s value creation performance.

Invested capital generally increased throughout the period, from US$27,256 million in February 2020 to US$36,107 million in February 2025. Despite this increase in capital employed, the economic spread ratio’s decline suggests that the returns generated from this capital have not kept pace with the cost of that capital in recent years.

Recent Performance

The economic spread ratio has consistently been negative in the most recent three periods observed (2023, 2024, and 2025). This sustained negative spread indicates a concerning trend of value destruction. The increasing magnitude of the negative spread from -2.64% to -1.94% suggests that the gap between the cost of capital and the return on invested capital is widening.

The economic profit margin exhibited significant fluctuations over the observed period. Initially negative, it transitioned to positive territory before declining again in subsequent years. A review of the figures reveals a complex performance pattern requiring further investigation.

Economic Profit Margin Trend

The economic profit margin began at -0.20% in February 2020, indicating that the company’s economic profit was negative relative to its net sales. A substantial improvement occurred in January 2021, with the margin rising to 0.20%. This positive margin was further amplified in January 2022, reaching a peak of 2.88%. However, the margin experienced a sharp reversal in January 2023, falling to -0.73%, and continued to decline, reaching -0.28% in February 2024 and -0.66% in February 2025.

The period between 2020 and 2022 demonstrates a clear progression from economic loss to substantial economic profit, as reflected in the economic profit margin. The subsequent years, however, show a consistent erosion of this profitability, culminating in a negative margin in both 2023, 2024 and 2025. This suggests a potential shift in the company’s ability to generate returns exceeding its cost of capital.

Relationship to Net Sales

Net sales generally increased from February 2020 to January 2023, moving from US$78,112 million to US$109,120 million. While net sales decreased slightly in February 2024 and February 2025, the decline in economic profit margin during these periods was more pronounced, indicating that factors beyond revenue volume were significantly impacting profitability. The negative economic profit in 2023, 2024 and 2025 despite substantial sales suggests increasing costs or a higher cost of capital.

The volatility in the economic profit margin warrants a deeper analysis of the underlying drivers. Further investigation should focus on understanding the components of economic profit – net operating profit after tax (NOPAT) and the cost of capital – to pinpoint the specific factors contributing to the observed trends. A detailed examination of operational efficiency, investment decisions, and capital structure is recommended.