ANALYSIS-New Target CEO slashes prices. Previous cuts offered short-lived sales boost.

By Savyata Mishra

March 13 (Reuters) - In his first big move since taking over as Target's TGT.N CEO last month, Michael Fiddelke took a page out of his predecessor's playbook to shore up demand: slashing prices on more than 3,000 products.

A strategy favored by former Target boss Brian Cornell during his more-than-a-decade tenure, the cuts were only partially successful. And the fresh round announced Wednesday is likely to raise investor expectations as Fiddelke tries to prove that his costlier capital outlay for the year will yield higher returns, and that a flurry of initiatives he presented at his first-ever investor day on March 3 will reverse three years of declines in sales.

The latest move would cut prices on apparel, home goods and daily essentials by 5% to 20%.

"The price cuts are a step in the right direction, but they alone are not enough to win back customers. The winning playbook is broader than simply lowering prices," said CFRA analyst Arun Sundaram.

In response to intensifying competition from Walmart WMT.N, and other aggressive retailers such as Aldi and Amazon AMZN.O - that set off a price war - Target cut prices several times between 2017 and 2024, often tied to holidays or strategic resets.

After Target reduced prices of 5,000 items in 2024, the retailer temporarily returned to same-store sales growth. But that did not last long as its overreliance on discretionary spending at a time when people were pulling back on all but essentials squeezed sales again.

Target's revenues have fallen for five straight quarters, while operating income has dropped for the past three even though the year-over-year pace of decline has slowed.

For Target's shareholders, who have seen total returns shrink more than 20% over the past five years against gains of more than 200% at rivals Walmart and Costco COST.O, the key, however, will be to win back customer visits quickly at a time of stiff competition and bargain hunting.

Target did not respond to an email seeking comment.

USING NEW INVESTMENTS TO FUEL GROWTH

"Target’s new chapter is all about fueling growth, and we’ll do so by playing our own game and making big changes to delight our guests,” Fiddelke said last week.

Analysts noted his sense of haste. Investors that day pushed Target's stock up 6%.

Boosting the company's budget to $6 billion this year, Fiddelke promised trendier apparel on store shelves, speedier deliveries, and a focus on artificial intelligence across its roughly 2,000 stores.

Fiddelke's revamp plan includes $5 billion in capital expenditures, a third more than last year. He has earmarked $1 billion to restock products faster, open new stores and remodel existing ones. Groceries will get over $1  billion, with stores dedicating more space to fresh items.

Target will also designate some locations as fulfillment-heavy hubs while others focus on shoppers, a shift from its earlier model of using nearly all stores as small fulfillment centers. Fiddelke also announced $1 billion in additional operating expenses.

"Fiddelke’s pace is aggressive but realistic if store execution and supply chain stay disciplined," said Michael Ashley Schulman, a partner at wealth management advisory firm Cerity Partners. "The challenge is to do this consistently across 2,000 stores. Retail turnarounds rarely get a second shot, and this is a big bet on consistency."

NEW INITIATIVES WILL TAKE TIME TO YIELD RESULTS

Under Cornell, Target spent a decade trying to reinvent itself, with mixed results. Target exited loss-making Canada operations in 2015, taking a massive writedown during his tenure. In a step similar to Fiddelke's new investment plans, Cornell spent $7  billion in 2017 to refresh stores, but ended up pressuring margins.

Fiddelke, who previously served as both operating and finance chief at Target, said sales would grow in every quarter this year. He also predicted an adjusted operating income margin of 4.8% for 2026, 20 basis points higher than last year.

Walmart, which famously drives big sales volumes through low margins, expects an operating margin of up to 4.4% for the same period, with a similar growth in revenue.

Target is also more leveraged than Walmart, leaving it with a smaller financial cushion as it ramps spending. Gaining market share may be tough for Target too, as Walmart has already cemented its place as the leader in the key groceries segment.

Any benefits from back-to-basics retail strategy will be gradual, said Jay Woods, chief market strategist at Freedom Capital Markets.

"The question is not only can (Fiddelke) do it, but will investors have the patience to wait."