Dive Brief:
- As it combats sales declines, Target will invest an additional $1 billion into the business in 2026. About $5 billion in capital expenditure is expected to “support new stores and remodels, enhancements to the store experience and advancements in technology and digital fulfillment capabilities,” per a company post.
- The investments come as the retailer’s third quarter net sales dropped 1.5% year over year to $25.3 billion and comparable sales decreased 2.7%, per a Wednesday press release. Merchandise sales decreased 1.9% and store comps dropped 3.8%, partly offset by digital sales growth.
- Net earnings declined 19.3% to $689 million and gross margin rate was roughly flat at 28.2%. The company maintained its fourth quarter expectation of a low-single-digit sales decline.
Dive Insight:
Target is “frustrated” with its own performance, COO and incoming CEO Michael Fiddelke said on a call with analysts Wednesday.
For merchandise sales, Target saw decreases in apparel and accessories, home furnishings and decor, and household essentials. However, there were mild sales increases in beauty, food and beverage, and hardlines.
“Last quarter the focus was on management changes at Target,” GlobalData Managing Director Neil Saunders said in emailed comments. “This quarter there is no such distraction, so attention goes back to Target’s miserable performance. ... The way out of this is for Target to grit its teeth and commit to the investment needed. Fortunately, this does seem to be coming through with a commitment to put an extra $1 billion into improving operation and stores in 2026. If this means Target needs to take a further step back on profit before it moves forward, we see this as a very necessary retreat.”
On brick-and-mortar, Target’s new larger format stores are outpacing its initial sales expectations, Fiddelke said on the call. Part of the retailer’s increased investment next year will support changes to “key floor pads throughout the store, which will accelerate both our merchandising authority and our experience,” the executive noted as an example.
Additionally, Target will make some changes to its product in the home category in addition to changing the store experience to “facilitate more discovery,” Chief Commercial Officer Rick Gomez told analysts.
Part of the company’s turnaround plan centers on the utilization of technology to drive efficiency and creativity, Fiddelke outlined during the call. The executive highlighted the use of AI for areas such as merchandising development, though he also flagged new use cases.
Target is now using AI to develop synthetic consumer audiences “that simulate real consumer populations to preview how different groups could respond to campaigns and products before they ever launch” in an effort to increase its go-to-market speed, Fiddelke added. Target will also debut a beta version of an app on OpenAI’s ChatGPT next week that allows customers to make multi-item purchases, the retailer announced in a separate post Wednesday.
Fitch Ratings Senior Director David Silverman praised Target’s investment in technology, merchandising and customer service in emailed comments Wednesday.
“Given the company’s recent challenges, these appear to be the right focus areas to stem market share losses and reawaken the ‘Tarzhay’ brand image which has supported the company’s strong longer-term track record,” Silverman said. “However, the company will need to contend with both strengthening competitors and, at least in the near term, continued consumer spending volatility, as they implement their plans.”
