New Target CEO Michael Fiddelke faces challenges

When Target’s new CEO Michael Fiddelke steps into the role in early February, he will inherit a company facing slumping sales, faltering customer loyalty and skeptical investors.

Its fiscal second-quarter results posted Wednesday illustrated the big-box retailer’s key challenges. Sales fell again from the year-ago period. Customer traffic declined. And shoppers spent less on average during their trips to Target’s website and stores than a year ago.

Fiddelke, announced Wednesday as Target CEO Brian Cornell’s successor, will soon lead the retailer’s comeback efforts and will have to show he can revitalize a company where he has spent about two decades. On an earnings call Wednesday, he acknowledged Target is falling short, but described his long run with the retailer as “an asset” and said he knows what Target can be at its best.

“I know we’re not realizing our full potential right now, and so I’m stepping into the role with a clear and urgent commitment to build new momentum in the business and get back to profitable growth,” he said.

Though Fiddelke is not yet in the role, he said Target isn’t waiting until his starting date in February to make changes.

He pledged to move with urgency to get the company back to sales growth. And he laid out his top three priorities, saying he would focus on winning back Target’s reputation as a strong merchant, enhancing the customer experience at stores and using technology to improve its business.

On Wednesday, Target said it had fresh evidence that its turnaround efforts are already bearing fruit. The company’s sales improved from the first quarter to the the second quarter, Fiddelke said, even though they were negative year over year. Sales trends in all six of Target’s key merchandise categories improved from the previous quarter, he said. And the retailer got better at fighting out-of-stocks, with the best on-shelf availability of items that it has had in years, he said.

It appears it will take more change to appease Wall Street, though. The second-quarter results extended a rocky several years for Target, which has tested the faith of many investors. Target’s market value has fallen from a high of $129 billion in 2021 to about $45 billion on Wednesday.

The 49-year-old Fiddelke rose through the Target ranks after starting as an intern. He has held positions across merchandising, finance, operations and human resources, including a recent stint as chief financial officer and his current role of chief operating officer. He also got tapped to lead the Enterprise Acceleration Office, a new effort that Target announced in May to kickstart its turnaround.

Yet Targets decision to hire the insider Fiddelke, instead of an external candidate, got a chilly reception. Investors responded to the pick with a stock selloff on Wednesday.

Shares fell more than 6% on Wednesday, bringing its losses so far this calendar year to about 27%. That trails well behind the more than 8% gains of the S&P 500 during the same period.

Wall Street had favored an outsider for the job, according to a June survey of 51 investors by Mizuho Securities, an equity research firm. About 96% of investors polled favored an external hire for Target’s next CEO, it found.

Manny Chirico, the former CEO of Calvin Klein and Tommy Hilfiger parent PVH, said investors were hungry for a bigger change.

“I think the market is questioning whether the internal candidate, with Brian [Cornell] staying on as executive chair, is that a bold enough move going forward?” he said in an interview Wednesday on CNBC’s “Squawk Box.”

One of Fiddelke’s first major challenges will be convincing investors and shoppers that Target can recapture the magic that turned it into a company that other retailers emulated and poached for talent.

Customers and former employees told CNBC the retailer had lost some of its best-known traits, including its clean and well-stocked stores, friendly staff and attention-grabbing merchandise. Some customers also decided to shop elsewhere in response as they protested its Pride collection, its subsequent move to pull some items from that line and its decision to roll back key diversity, equity and inclusion efforts

Target became known as “Tarzhay,” a French-sounding nickname, because of its strength in offering trendy and often exclusive clothing, home decor and more at lower prices. It turned its stores into a mall-like experience by adding Starbucks and small shops from Ulta Beauty.

The company’s ability to nudge shoppers to splurge sparked jokes and social media memes about walking into the store for one item, yet walking out with dozens.

“There was a time when Target was on top of the world,” said David Bellinger, retail analyst for Mizuho Securities, on Wednesday.

Target’s sales rose more than $15 billion in the fiscal year following the start of the Covid pandemic, fueled in part by stimulus dollars. Its shares soared to an all-time closing high of $266.39 in 2021. On Wednesday afternoon, its stock was trading more than 60% below that level, closing the day at $98.69.

Target’s annual sales have been roughly flat for the past four years. Target said it expects total sales to fall by a low-single-digit percentage this fiscal year.

Other factors hurt Target after the pandemic. Customers shelled out on dining, concerts and vacations and faced decades-high inflation. And the retail supply chain faced new tests, most recently in the form of President Donald Trump’s tariff hikes.

Target also lost ground with competitors. Chief Commercial Officer Rick Gomez said on Target’s earnings call in May that the retailer held or gained market share in 15 of its 35 merchandise divisions in the first quarter. Put another way, it lost ground in the majority of categories that it sells.

While Target faced problems out of its power, many of its issues were self-inflicted, Stacey Widlitz, president of SW Retail Advisors, told CNBC’s “Squawk Box” on Wednesday.

“It’s used to be clean and exciting and fresh brands,” she said. “That has just all changed in the past two years, and we’ve heard them talk about how they’re going to fix it, and we haven’t seen it.”

Bellinger said he has seen the changes on trips to his nearby Target store. Curbside pickup is quick and convenient. But inside of the store, he said a lot of merchandise is locked up to prevent theft, customers wait in long lines to check out and the cashier area is short-staffed.

“It’s just not an easy shopping experience,” he said.

In one of the new challenges Fiddelke will have to face, Target and Ulta next August will end their partnership, which had helped to drive beauty sales for Target.

Even before the CEO announcement, Target touted its plan to get back to its Tarzhay image. Its leaders have pointed to signs that strategy is working.

Target’s limited-time collection with Kate Spade, which launched in mid-April and included colorful dresses, accessories and more, was its strongest designer partnership in a decade.

Gomez described its new line of Champion activewear and sporting goods, which debuted this month, as “really the epitome of Tarzhay.”

The work to make merchandise more appealing will continue, Fiddelke said Wednesday. For example, he said it’s overhauling its hardlines category, which includes items like TVs, laptops, toys and trading cards.

Target also wants to turn around weaker sales in its home goods category. Its new Disney and Marvel-themed bedding and decor in its kids’ home line, Pillowfort, and new colors, patterns and fabrics in Casaluna, its premium bedding line, have been popular, Fiddelke said.

“Now, what the team needs to do is say ‘Okay, we need to do more of that, more consistently, more frequently, across bigger parts of the business,'” he said.

It plans to make changes next year to Threshold, its largest home goods brand, he said.

Beyond fixing its brands and launching new merchandise, Fiddelke’s ability to turn around the company may hinge on one critical task: restoring the identity of a retailer that loyal customers knew and loved.

“If Target went away tomorrow, you’d have a lot of disappointed consumers, millions of consumers,” Bellinger said. “There is a true core customer who loves Target, and there’s a ton of upside here, if they can figure it out.”