Here's a fun retail puzzle: what happens when a company's sales go down but its stock price goes up? If you guessed "Target just reported earnings," you'd be right. Shares of Target Corporation (TGT) rose in premarket trading Tuesday after the retailer delivered a stronger-than-expected profit report.

Investors seemed perfectly happy to look past a slight sales dip because Target showed something arguably more important right now: steadier, and even improving, margins. The story wasn't about a top-line boom; it was about doing more with what they have. Notably, food and beverage, beauty, and toys all posted net sales growth during the quarter, while essentials and home categories showed improved trends compared to the messy third quarter. It's a sign that even in a cautious consumer environment, people are still spending on specific things they want.

The Numbers Behind the Beat

So, how did they pull it off? The company reported fourth-quarter adjusted earnings per share of $2.44, comfortably beating the analyst consensus estimate of $2.15. The quarterly sales figure of $30.453 billion (down 1.5% year over year) did technically miss the Street view of $30.512 billion, but that miss was clearly deemed insignificant next to the profit strength.

Digging into the sales details, fourth-quarter comparable sales decreased 2.5%. This was driven by a 3.9% decline in comparable-store sales, partially offset by a 1.9% increase in comparable digital sales. It's a mixed bag, but the digital growth is a positive sign for the omnichannel strategy.

The category breakdown tells a clearer story of where consumers are putting their money. Apparel & accessories sales fell to $4.100 billion from $4.344 billion a year ago. But beauty sales ticked up to $3.484 billion from $3.444 billion. More importantly, sales in the food & beverage unit—a classic essential—grew to $6.638 billion from $6.520 billion. And then there's the advertising business, which isn't about selling goods at all. That revenue jumped to $295 million from $190 million a year ago. That's high-margin income that directly helps the bottom line.

Speaking of the bottom line, quarterly adjusted operating income was $1.5 billion, slightly above last year. The adjusted operating income margin rate improved to 4.8% from 4.7%. The real star was the gross margin rate, which expanded to 26.6% from 26.2% a year ago. Management credited lower inventory shrink (that's retail speak for theft and loss), lower supply chain and digital fulfillment costs, and, you guessed it, that growth in advertising and other revenues.

Target exited the quarter with a very healthy $5.488 billion in cash and equivalents, giving it plenty of flexibility.

What's Next for Target?

Looking ahead, the company is guiding for full-year 2026 adjusted EPS in the range of $7.50 to $8.50. The midpoint of that range is above the current analyst consensus estimate of $7.68. It projects sales of $106.876 billion, which is also just a hair above the analyst estimate of $106.672 billion. For the more accounting-minded, the fiscal 2026 GAAP EPS outlook is also $7.50 to $8.50, versus a $7.76 estimate.

The first-quarter outlook is where expectations get a slight reality check. The company expects adjusted earnings per share to be more than $1.30, which is below the current analyst estimate of $1.50. The GAAP EPS expectation of more than $1.30 also trails the $1.53 estimate. It suggests the road to that full-year target might have a slower start.

In the end, Target's report is a lesson in what the market is rewarding. It's not just about growth at all costs anymore. It's about profitable growth, cost control, and playing smart with the hand you're dealt. For now, investors are buying that story, sending Target shares up 3.47% to $117.10 in premarket action.