Target’s long downward spiral () continued into the third quarter, highlighting the numerous challenges facing the major retailer’s future CEO — from intense competition to a weakened economy.
Chief Operating Officer Michael Fiddelke, who will take on the top role in February, is looking to revive Target’s fun factor — and with it, sales growth — in part with a friendlier staff and merchandise that better captures current trends.
But it needs to make up ground lost to competitors in an economy increasingly pressured by a slowing job market and inflation. Consumers reduced spending on apparel and home goods, categories that Target used to use to boost results. Discounts also affected profitability.
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Target’s results contrasted sharply with those of TJX Cos., operator of TJ Maxx, which raised its outlook on Wednesday, showing that the bargain-hunting, value-for-money experience still attracts consumers when executed well.
In a report, Bernstein analyst Zhihan Ma said Target faces “additional uncertainty” in the current quarter “as consumers feel more pressure from rising inflation and lower real purchasing power.”
The company is also “less differentiated in its core apparel and home categories, where Walmart is catching up, low-price competition is strong, and the move online is structural,” she wrote.
Walmart has gained market share by using its enormous scale to keep prices low, expand product selection, and improve online purchasing and delivery options.
Target now expects earnings per share, excluding some items, of between $7 and $8 this year, lowering the ceiling from its previous forecast. By the same criteria, third-quarter results surpassed analysts’ average estimates, but the key metric of comparable sales contracted more than expected.
“We are tireless in the search for a return to growth and we are not satisfied with the current results,” said Fiddelke in a press conference with journalists.
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Target shares were down 0.9% at 10:51 a.m. in New York. The stock is down nearly 35% this year through Tuesday’s close, lagging the S&P 500 index’s nearly 13% advance.
Style and experience
Fiddelke, who began his career at Target as a summer intern in 2003, promised to focus more on style, improve the shopping experience and use technology more effectively. The company faced “instability” in its business during the quarter, he said, and is adjusting its forecast accordingly. He added that it has been difficult to identify the specific reasons for the weakness.
The future CEO told analysts on Wednesday that the company is moving forward with store changes to improve performance rather than waiting for a broader economic improvement.
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Target plans to increase capital expenditures to $5 billion next year — a 25% increase — to renovate stores, open new locations and finance improvements to merchandise and the shopping experience. This includes ensuring friendly service and available products.
“While there is still work to do, we are moving in the right direction,” said Chief Commercial Officer Rick Gomez. Consumers remain selective and prioritize value, he said.
The company, which has faced boycotts this year after backtracking on diversity initiatives, has cut prices on thousands of essential items and expanded offerings of cheaper seasonal products such as $1 ornaments and $10 blankets.
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Consumers will continue to compromise this holiday season to save money and will “prioritize what goes under the tree over what goes on the tree,” Gomez said.
Target is also considering expanding its beauty line after ending its deal with Ulta Beauty, he said. The company wants to expand its baby products department and make changes to the struggling home products category.
Additionally, the retailer is using artificial intelligence to improve operations, identifying trends and improving customer service. Target announced a partnership with OpenAI to allow consumers to use ChatGPT on its platform, following rival Walmart. Customers will be able to make purchases via ChatGPT and receive personalized recommendations, among other features.
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Target reported that the rate of losses due to theft, damage and other factors returned to pre-pandemic levels. In retail in general, theft has decreased with companies’ collaboration with authorities, better stock control and product protection. In 2023, Target closed stores on the US West Coast and in New York due to increased theft.
The company also carried out its first major restructuring in a decade last month, eliminating 1,800 positions.
“Fun101”
Target reported progress in its goal of recreating a light environment with stylish products and competitive prices.
The “Fun101” initiative — an effort to renew some merchandise categories — is starting to generate growth. Toy sales rose nearly 10%, while electronic games, sports equipment and music grew by double digits, Gomez said.
Food sales also increased, driven by strong demand for beverages and wellness items. Apparel sales were still negative, although the jeans segment grew.
Overall, Target “was unable to build on the prior quarter’s incremental progress,” Emarketer analyst Sky Canaves wrote in a research note. This reinforces that “a real recovery is still some way off, and new CEO Michael Fiddelke will have a big challenge when he takes the helm early next year.”
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