The news: Target will spend $5 billion next year to upgrade stores, merchandise, and digital capabilities, incoming CEO Michael Fiddelke said, as it works to get back into growth mode.

• Net sales fell 1.5% YoY in Q3, marking the 12th straight quarter of flat or declining sales.
• Store traffic declined 2.7% YoY during the quarter, per Placer.ai, despite a slight bump in October from its Target Circle Week sale and Taylor Swift’s latest album release.

The big picture: Target’s reliance on discretionary spending is a major disadvantage as consumers cut back on unnecessary purchases.

• Shoppers are being “choiceful, stretching budgets, and prioritizing value,” chief commercial officer Rick Gomez said during the earnings call.
• While consumers are willing to spend on new and on-trend products, Target is struggling to deliver. Comparable apparel sales fell 5% YoY, with similar softness in the home category, despite efforts to inject more newness and style.

The turnaround plan: While Target’s problems are easily diagnosed, solving them will be considerably harder. Fiddelke’s turnaround plan centers on three key themes: restoring Target’s merchandising authority, enhancing the omnichannel experience, and investing in technology to improve speed, efficiency, and the guest journey.

• To bring back the “Tarzhay” magic, the retailer is leaning on AI to help surface emerging social trends faster, quickly identify strong-performing products for Target shoppers, and better predict trends. Those efforts are helping to get inventory on shelves faster, though the company clearly has more work to do to stay relevant with customers.
• The company also announced an integration with ChatGPT to enable customers to shop through the latter’s app. The partnership will make Target one of the first retailers to sell fresh food on the platform and one of the first to enable ChatGPT users to purchase multiple items in a single transaction.
• Target’s efforts to improve the in-store experience include opening more larger-format stores and remodeling others to encourage product discovery and impulse purchases.

Our take: Target’s ability to dig itself out of its current hole will largely depend on how quickly it can fix its merchandising problem and improve the in-store experience. Its $5 billion investment should help with the latter, but figuring out how to consistently deliver a compelling assortment to increasingly value-focused shoppers will be a trickier hurdle to overcome.