Target Stock Tumbles. Why a CEO Change Is Overshadowing an Earnings Beat.

Target stock is down 22% this year as of Tuesday’s close. (Justin Sullivan/Getty Images)

Target reported stronger-than-expected second-quarter earnings Wednesday, but that may not matter much to investors, who finally know who the retailer’s next chief executive is going to be.

Target announced that longtime veteran and current Chief Operating Officer Michael Fiddelke will succeed CEO Brian Cornell on Feb. 1. Cornell will then transition to the role of executive chair of Target’s board of directors.

Target stock has dropped 10% to $94.85 in premarket trading, while S&P 500 futures were off 0.1% and Dow Jones Industrial Average futures were flat.

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The announcement disappointed investors who hoped an external hire would bring in fresh perspective to the retailer, which has lost its shine.

“While we have not met Mr. Fiddelke, his background is impressive as a 20+ year company veteran. His ‘fresh eyes’ perspective could bring material change to the business,” writes Mizuho analyst David Bellinger. “However, and as indicated by the pre-market move in shares, we and the investment community preferred an external candidate to bring wholesale change to Target.”

The decision, however, was part of a deliberate and thoughtful succession process that included an external search, said Christine Leahy, lead independent director of Target’s board. Fiddelke, who has been at Target for about two decades, was determined to be the man for the job. And indeed, his appointment is hardly a surprise given that he was named as chief operating officer a little over a year ago and has served in other executive roles, including as Target’s chief financial officer.

“Michael’s tenure gives him unmatched enterprise insight and a base of strong team trust,” Leahy said.

Fiddelke also views his tenure as an advantage as he takes charge of Target’s turnaround efforts.

“I understand this business, I understand what makes Target distinctly unique, and I’ve seen us at our best, and I’ve seen us when we’re not at our best, and that informs my candid assessment today of where we have work to do as well,” Fiddelke said on a call with reporters Tuesday in response to a question from Barron’s.

There’s certainly enough work to go around. Target’s annual revenue has declined for two consecutive fiscal years and was on track to notch its third year of decreases. Once viewed as a retail winner, Target has suffered from a dearth of merchandise, skimpy staff, and messy stores that have pushed loyal shoppers toward competitors such as Walmart , Costco Wholesale , and Amazon.com, as Barron’s reported earlier this year.

The company’s woes are reflected in its share price. Target stock has declined 22% this year as of Tuesday’s close, significantly underperforming the 9% gain of the S&P 500.

Fiddelke’s top goal as CEO is to get Target back to growth, he said, outlining three main priorities: sprucing up merchandise to reclaim style and design leadership; improving the consistency of the in-store experience; and investing in technology across Target’s operations to increase speed and efficiency.

Some of those efforts are already under way, Fiddelke said, spearheaded by Target’s new “Enterprise Acceleration Office,” which he oversees. Early results seem promising, he said, such as the double-digit growth in children’s home décor resulting from new merchandise.

“Now, we need more of those examples across categories, but they give me a ton of confidence that we’re on the right path there,” Fiddelke said.

And indeed, Target’s second-quarter earnings, released Wednesday, showed some signs of improvement. The retailer’s sales dipped 0.9% year over year to $25.2 billion, but topped analysts’ projections for $24.9 billion.

Adjusted earnings per share of $2.05 were also slightly ahead of the $2.04 Wall Street had penciled in, even though the company noted that higher markdowns and tariff costs had pared down gross margins. Disciplined cost management helped offset the worst of the impact, executives said.

Target also reiterated fiscal-year guidance. It continues to expect a low-single digit decline in sales, while adjusted earnings per share will range from $7 to $9. Consensus estimates call for a roughly 1.5% drop in sales and adjusted earnings of $7.28 a share.

“Target saw improvements in Q2,” wrote Zhihan Ma, an analyst at Bernstein who rates the stock Underperform. But, she notes, the company “is still not out of the woods.” Same-store sales were still negative, declining 1.9%, and the company still has to navigate a host of macroeconomic challenges, including higher tariffs and slowing consumer demand.

Given that setup, “it is likely hard for the market to get behind a turnaround led by a long tenured insider,” Ma added.

“In particular, Mr. Fiddelke has led TGT’s omnichannel operations in recent years, where we believe TGT faces a tough trade-off between sales and margins due to its lack of investment in automation and supply chain capabilities,” she wrote.

Oppenheimer analyst Rupesh Parikh, who rates the stock Outperform, believes Fiddelke’s experience at Target and fit within the company’s culture makes him “the right choice” for CEO despite the market’s push for an outside hire.

At the very least, Fiddelke deserves a chance to prove himself. But the stakes are high, and investor patience with Target’s management is already wearing thin. All eyes now turn to Fiddelke, as the company’s future hinges on whether his two decades of experience are a foundation for renewal or a sign of more of the same.

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