Investors panned Target’s choice of insider Michael Fiddelke as CEO today, viewing the 20-year company veteran as unlikely to fix the retailer’s myriad issues that have resulted in years of stock-market underperformance.
Fiddelke, 49, won’t start until February of next year, when he replaces current CEO Brian Cornell. In his first media call as incoming CEO, Fiddelke said his “number one goal is to get us back to growth.” But investors see that as a tall order.
Shares dropped more than 7% today, even as quarterly same-store sales declined less than anticipated and overall revenue came in ahead of expectations. Analysts said Target could have looked outside for new leadership after years of sales struggles, merchandise missteps and inventory management problems.
The company’s operating margin dipped in its most recent quarter as well, and outgoing CEO Cornell said it will face challenges due to tariffs.
“We have very mixed feelings about this appointment,” said Neil Saunders, managing director at GlobalData. “This is an internal appointment that does not necessarily remedy the problems of entrenched groupthink and the inward-looking mindset that have plagued Target for years.”
Cornell said they chose Fiddelke for his background, experience, and track record at Target, where he has held a variety of leadership roles. Recently, he led the company’s enterprise acceleration office, an effort to shape how Target operates by removing complexity and expanding technology.
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The company’s struggles have manifested in a consistently weak share performance. The stock is down 23% over the last five years, a period of time where Walmart has risen 125% and Costco has more than tripled.
Over the past year, Target has faced challenges in maintaining steady sales growth, and its pullback on diversity, equity, and inclusion policies in January angered some loyal customers who long praised the company’s commitment to inclusiveness. Fiddelke, currently the chief operating officer, said that his three priorities are to improve the quality of merchandise, value, and style that Target offers, ensure a more consistent experience for shoppers, and use more technology in all parts of its business.
“We need to move faster, much faster,” he said.
Some investors were not convinced.
“What we need, broadly, is any indication that actual change is afoot or that Target has a plan to return to growth,” said Charles Sizemore, a longtime shareholder who exited his position earlier this month. “I reached the conclusion that no turnaround would be happening on a reasonable timeline.” The company held onto its annual forecasts after lowering them in May, when it blamed weak demand for the largely discretionary merchandise it sells like apparel and electronics.
Second-quarter comparable store sales fell 1.9%, smaller than expectations for a 3% decline. Its operating income margin fell to 5.2% from 6.4% a year earlier. The decline was driven by deeper markdowns, costs from canceled purchase orders and weaker demand for discretionary items, which make up a large portion of its product mix.
“Given the many challenges TGT has faced over the last several years, it’s not surprising that investors were leaning towards an external hire,” said Steven Shemesh, analyst at RBC Capital Markets. “In either case, however, TGT faces a steep uphill battle to bridge the gap with competitors in an increasingly digital world,”
To be sure, Target has taken steps to turn itself around, including intensifying efforts to entice customers worried about the economy. These efforts have included offering 10,000 new items starting at $1, with most priced under $20, and launching several affordable private-label lines.
Still, consumers remain selective and are motivated by promotions as inflation continues to strain household budgets, Target executives noted on the call.
Target reported second-quarter net sales of $25.21 billion, beating estimates of $24.93 billion, according to data compiled by LSEG. Excluding items, the company reported earnings per share of $2.05, which topped Wall Street estimates by 2 cents. Its challenges are being complicated by tariffs, which Cornell said will pressure the company’s profit-and-loss, even as it reiterated that price increases would be considered only as a last resort. “We were facing some major financial and operational hurdles as we entered the year. This was further complicated by the multiple changes in tariffs policy,” Cornell told investors.
CEO SEARCH
Investors have speculated for quite some time as to who would replace Cornell after he agreed to stay in the position for three more years in September 2022, even though that put him beyond the company’s retirement age of 65. At the time, Target did not reveal the expiration date of his contract or name a successor.
On a media call, Cornell said he had been working with the board for several years on succession planning, and had evaluated both internal and external candidates. The company did not say which search firm it hired or which external candidates were considered.