By Sabrina Escobar

Even Target loyalists are finding it hard to stick with the beleaguered retailer these days.

Devika Jhunjhunwala needed three frames to hang on her wall. But as she scanned the near-empty shelves of the picture-frame aisle at her local Target in Richmond, Va., she realized the store had only one in the right size and color. The HomeGoods store across the street also had only one frame. So when she got home, she placed an order on Amazon for the missing frame, annoyed that what should have been a one-stop Target trip had turned into a triple-retailer odyssey.

Jhunjhunwala isn't alone in her frustration. Once viewed as a retail winner, Target has suffered from a dearth of merchandise, skimpy staff, messy stores, and even its approach to diversity, equity, and inclusion policies. These problems have left the storied retailer in a precarious position, fighting not just for growth but also for its place in a hotly competitive U.S. retail market dominated by innovative, well-capitalized giants such as Walmart, Costco Wholesale, and Amazon.com. Target's stock, reflecting those troubles, has dropped 43% over the past three years.

The company is taking steps to turn its business around. At an investor day in March, Target announced plans to spend billions to remodel and open stores, and improve its supply chain and its technology. It has also partnered with brands such as Kate Spade and Champion, and cut prices on thousands of items, including groceries and beauty products.

But there's still a long way to go. The time has come for more drastic action. Target needs to refresh its stores, invest in e-commerce, and repair its tarnished brand to lure shoppers back. Without big changes and a sense of urgency, Target could become the proverbial melting ice cube, paying a chunky dividend as it follows retailers like Kohl's and Kmart into irrelevancy. It won't be pleasant -- margins will get squeezed, shares will likely fall -- but, then again, neither have the past three years.

"There are things that Target certainly does well and has carved out a niche in, but they need to be forward thinking here if they want to compete over the long term, especially as the environment shifts more online," says Steven Shemesh, an analyst at RBC Capital Markets.

From the very beginning, Target presented itself as a fashionable shopping destination, luring customers rich and poor with chic merchandise, a premium experience, and value-oriented prices. The company, which opened its first stores in 1962, eventually picked up the faux-French nickname "Tarzhay." Now, that idea feels like an ironic joke.

Target's troubles began in 2022, after the Covid-19 pandemic upended global supply chains and shopping habits. Merchandise piled up and the company found itself needing to discount aggressively to unload apparel, seasonal décor, and furniture, taking heavy losses in the process. Shoplifting also increased, and Target, like many retailers, responded by placing many of its products in locked cabinets. While that solution helped reduce "shrink," the industry term for petty theft, it also annoyed shoppers to no end.

The pandemic had another side effect: inflation. Rising prices meant shoppers had to spend more on groceries and other essentials, where Target is weaker, and less on discretionary items, the Minneapolis-based retailer's bread and butter. What's more, its prices were often higher than many competitors -- even local grocery stores -- which proved a boon for Walmart, Amazon, and Costco. From 2021 to 2024, Target was the only one of those four top retailers to lose, rather than gain, market share, with its total share of core retail spending falling 0.18 percentage points, from 2.29% to 2.11%, according to an analysis from London-based GlobalData.

Target is doing better online. The company's e-commerce model, which uses stores to fulfill web orders, worked well as a quick -- and profitable -- fix during the pandemic. The gains it made there have been sticky, too, with those sales now accounting for about 20% of Target's total revenue, a greater share than Walmart's roughly 17% of sales. But the model, which requires workers to find items on store shelves for shipping, is too inefficient to compete with Walmart and Amazon, which have invested billions of dollars in automation and distribution centers. Bernstein analyst Zhihan Ma notes that the labor-intensive operations won't allow for much margin improvement going forward. It can also erode the in-store experience by pulling employees away from tasks such as stocking shelves, keeping aisles tidy, and helping customers check out.

Target's woes are visible in its financial statements. Annual revenue has declined for two consecutive fiscal years, falling 1.6% year over year in the fiscal year ended January 2024, and 0.8% in the fiscal year ended this January. Sales fell 2.8% in the latest quarter, while earnings per share fell to $8.86 in the latest fiscal year from $8.94 the prior year. The results were bad enough that Target's head of growth departed and the company instituted a new "Enterprise Acceleration Office" in recognition that drastic action was needed. The team aims to drive "even greater speed and agility across the company."

"Target is a company designed to deliver long-term profitable growth," said a Target spokesman in an emailed statement to Barron's. "By focusing on what differentiates us -- affordable style, ease, value and store innovation -- we're navigating near-term challenges while investing for the future."

Investors aren't buying it. Target's stock dropped 5% the day of the earnings release and is now down 64% from a November 2021 all-time high of $266.39. Shares trade for 12.6 times the next 12 months' estimated earnings, compared with a five-year average price/earnings multiple of 17. But even that might not be cheap enough. David Wagner, a portfolio manager at Aptus Capital Advisors, doesn't see the stock "working" until the company gets its brand mojo back.

And that assumes it can. For now, that task falls to CEO Brian Cornell, who has led the company since 2014. Under Cornell, Target expanded its e-commerce capabilities, debuted new private labels, rolled out the Target Circle loyalty program, and surpassed $100 billion in annual revenue. Wall Street, though, is a "what have you done for me lately" business, and with Cornell's contract up this fall, it's unclear that the company will renew it. "At the end of the day, you live and die by your share price, and if heads gotta roll, heads gotta roll," Wagner says.

Yet no matter who's leading the company, the task is enormous. On top of its executional challenges, Target has a high exposure to Chinese tariffs, analysts say, which could add another layer of complexity to the equation.

Tariffs aside, Target needs to return to what it did well in the first place -- create an appealing in-store experience. Stores still account for roughly 80% of the company's annual revenue, and for many consumers, a good in-person experience was what set Target apart from its rivals. It's what convinced Sarah Murdoch, a 50-year-old travel journalist and tour operator based in Seattle, to make weekly Target runs, where she would typically spend more than $200. She had slowly grown disillusioned with her store's messy aisles, but the "last straw" came when she tried to buy a pair of socks, only to find them under lock and key.

"That has always been the genius of Target -- you always end up buying stuff you didn't expect and stuff that's fun," Murdoch says. "But there's no fun anymore. The stores just feel really kind of dingy, unkempt, with stuff locked behind doors."

Target knows it needs to improve its stores -- and the technology it uses to run them. The company expects capital expenditures at the lower end of a $4 billion to $5 billion range in fiscal 2025, up from $2.9 billion in 2024. The money will be spent on opening new stores, renovating existing ones, and improving supply chains. Target also needs to invest in next-generation technology, including artificial intelligence, that can analyze consumer demand and tailor inventory orders to specific store needs, says Sharmila Chatterjee, a senior lecturer on marketing at MIT Sloan School of Management. In that sense, at least, the company is making strides, executives said at Target's 2025 investor day. Target recently rolled out new measures that provide greater inventory precision and noted that out-of-stock numbers were lower in each quarter of 2024 than the prior two years, though it didn't provide precise out-of-stock figures.

But what Target really needs is people, says Neil Saunders, managing director at GlobalData Retail. The company trimmed employee count in the fiscal years ended January 2023 and 2024, as sales growth slowed and margins were squeezed, he says. Target cut the total number of employees from 450,000 in January 2022 to 415,000 as of February 2024 , a decline of 8%. While employee count ticked up to 440,000 as of this February, the company needs hiring to continue. More employees mean more people on the floor helping customers, restocking shelves and backrooms, and keeping stores neat. (And yes, Target should stop locking up merchandise where possible.)

Target also needs to embrace the digital age. Walmart and Amazon have invested billions in automating massive distribution centers to send out most nongrocery orders, on top of their in-store fulfillment strategies. While these efforts have weighed on those retail behemoths' profitability for years, they're starting to pay off, and will provide runways for future margin expansion as automation evolves.

The effort to improve Target's online business, however, will be costly, and likely pressure its operating margin. That's currently at 5.2%, above Walmart's 4.4%. But while Walmart's tech spending is largely completed, providing the opportunity for margins to expand, Target's is likely to increase. Even then, the effort could fall short given differences in size and scale between the two retailers.

"Because of their lack of real capital-intensive investments in the e-commerce supply chain, they don't have the same pathway as Walmart does to really improve, structurally improve, e-commerce profitability from here," Bernstein analyst Ma says. Ma recently downgraded Target stock to Underperform, arguing that the company's lack of e-commerce-automation investments will turn future e-commerce growth into a "persistent margin headwind."

Target can start the turnaround process by making sure all its stores have a well-staffed dedicated fulfillment team, reducing the need for workers from other departments to get pulled from in-store duties to help fill online orders. The company, which plans to open more than 20 new stores by the end of the year and to remodel "many more," can also ensure that the design better supports online fulfillment through larger backrooms. High-volume stores can even have micro-fulfillment centers -- smaller storage facilities that are highly automated and well-stocked with the most-ordered products, reducing the need for employees to pick merchandise directly from aisles.

Correcting these problems means Target has to take "a step back on profit" in the short term, Saunders says, which may not be feasible given that investors are getting impatient to see returns after close to three years of lackluster performance.

"They've got a real problem -- I don't think that they have resourced properly, and I don't think they've got the headroom and profitability to resource properly," Saunders says. "It's a Catch-22."

More immediately, Target needs to move past its DEI public-relations blunders. Target has always had a liberal bent, dating back to 2003 when it first established an office for diversity and inclusion. The next 20 years saw an expansion of DEI policies, and in the 2020 racial reckoning era that followed the murder of George Floyd, Target became a "poster child" for DEI, says Natalie Norfus, founder of DEI consulting company The Norfus Firm.

But Target misread the moment. In 2023, its gay pride collection, which featured a "tuck-friendly" bathing suit for transgender people, drew the ire of conservative consumers, leading to boycott calls that linger to this day. The company reversed certain DEI policies earlier this year, but that prompted boycotts from the left that have contributed to 10 consecutive weeks of year-over-year declines in store foot traffic.

For some longtime customers, Target's reversal felt like a betrayal. Rebecca Brunson, a 32-year-old content strategist from Orlando, Fla., used to spend up to $100 a week at Target, but the decision to pull back from DEI made her feel like the rug was yanked out from under her. She joined the boycott. Even if the company were to re-embrace DEI, she's not sure she'll be as generous a consumer as she once was. Since breaking her Target habit, Brunson has found that she's shopping less overall and would like to keep it that way.

Target's best bet might be to walk a fine line by emphasizing its dedication to creating a strong workplace and welcoming shopping environment for everyone while staying away from lightning-rod issues, Norfus says. That may be the path the company has chosen to follow.

"Every day, in everything we do, we will continue to be anchored in the belief that creating an environment where people feel included, supported and respected makes us a stronger company," Cornell said on the company's May earnings call.

Of course, with the stock trading at about a third of Walmart's 36.1 times and a quarter of Costco's 52.3, some investors see opportunity. It wouldn't take much -- a CEO change, perhaps, or an activist investor -- for shares to get a short-term pop. Target's 4.6% dividend yield also means investors will be paid to wait. But the dividend can't be the only thing Target has working for it. Unless Target finds a new path to growth, it risks becoming a company that generates as much free cash flow as possible until the business eventually peters out, Bernstein's Ma says.

It doesn't have to come to that. Consumers are still fond of Target, and many are rooting for it to turn the ship around. But the longer Target's problems go unsolved, the more likely they never will be.

It may not be worth sticking around to find out.

Write to Sabrina Escobar at sabrina.escobar@barrons.com

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May 30, 2025 01:00 ET (05:00 GMT)

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