The old proverb “new brooms sweep clean” is often misleadingly mentioned to suggest that new hires are more thorough. This omits the crucial second half of the saying, which warrants attention: “but an old broom knows the corners.”
The full saying's wisdom is particularly evident when observing how the emerging recovery initiative at the renowned retail company Target seems to be solidifying, notwithstanding considerable initial doubt. Despite ongoing difficulties, is it possible that Target's recovery is on track, defying the doubters?
Evidence indicates that concerning CEO transitions, seasoned leaders are indeed familiar with the intricacies.
This skepticism seemed so profound that just two months prior, when Target revealed that its long-serving and highly respected CEO, Brian Cornell, was stepping down and that Michael Fiddelke, a 20-year veteran of the company, would assume the reins, the stock immediately plummeted 8%, with sellside Wall Street analysts commenting that “investors were hopeful for an external hire,” and “this internal appointment does not remedy the problems of entrenched groupthink and inward-looking Mindset.” (The company's stock has fallen over 33% this year.)
Even though Fiddelke's background includes starting at Target more than twenty years ago as an intern, and holding nearly every position within the company spanning retail, merchandising, operations, finance, and supply chain Given that many appeared to dismiss him from the outset, largely due to his insider position. Perhaps that assessment was too hasty.
It's natural for investors to instinctively favor external candidates stepping in to lead companies during periods of instability. We recognize that there's no universal answer; sometimes, an external party is truly required to instigate change and reset the situation. Cornell himself came to Target from PepsiCo when Target was mired in crisis during a costly data breach and plummeting revenues, and Target back to growth within a couple of years.
However, our a novel, independent examination of recent leadership changes within Coins2Day 500 companies indicates, contrary to expectations, that CEOs promoted from within have consistently achieved better results than those hired from outside. Demonstrated exceptional performance, significantly outperforming in total shareholder return (TSR).
We examined every CEO change within the Coins2Day 500 companies, and our findings indicate that out of the 61 CEO changes occurring in the past year, the 39 CEOs promoted internally have achieved an average TSR of 14.81% annually, whereas the 22 CEOs who were Companies chosen externally have produced an average TSR of -9.01% yearly.
Was that a one-year anomaly? When examining the figures across an extended timeframe, it became apparent that this same pattern remained consistently valid. Our findings indicate that of the 93 CEO changes observed in the past one to three years, 71 internal CEOs have produced achieved an average annualized return of 10.16%, whereas the 22 external CEOs collectively produced an average annualized return of 6.35%.
In addition, the Of the 84 CEO transitions observed within the Coins2Day 500 during the past three to five years, 70 involved internal promotions. Have achieved a 12.68% average annualized return, whereas the 13 external CEOs have achieved a 6.42% average annualized return.
Simply put, the data is clear that no matter how you slice and dice it, there has been dramatic stock outperformance by internal CEOs vs. External CEOs when it comes to recent Coins2Day 500 CEO transitions. The conclusions drawn from our original analysis of recent CEO performance closely parallel the findings of other renowned management and corporate governance scholars. In his 2007 book, “The CEO Within,” Joseph Bower of Harvard Business School discovered that CEOs hired from outside the company often lack the in-depth knowledge of the company’s culture and history needed to succeed. Similarly, Stanford’s David Larcker and Brian Tayan found that the data consistently shows across decades that internal CEOs outperform external CEOs. Many scholars have found the same conclusion holds true over more discrete time periods even beyond the ones we measured, such as during the COVID pandemic.
While there is never a one-size-fits-all prescription that works in all cases, the data seems to suggest that the greatest change agent CEOs tend to come from within – internal CEOs tend to have a deep understanding of their company, what makes it tick, and even more importantly, where the bodies are buried, and what needs to change – and with the know-how, cultural savvy, and buy-in needed to make tough decisions on day one.
Target's path remains tough, but the bullseye is nearing.
As he retires, Brian Cornell has much to be proud of as one of the most admired and accomplished CEOs in retail. During his decade-plus tenure, he has transformed Target from a beleaguered company beset by crises when he arrived, into a retail powerhouse with over $100 billion of revenue today; successfully transitioned Target into an omnichannel retailer with significant e-commerce capabilities; reinvigorated the company’s lucrative, higher-margin private brand business to the tune of more than $30 billion a year in sales; and expanded the company’s geographic footprint to nearly 2,000 fully owned stores. And while the current stock price doesn’t reflect all these achievements, he has bought back billions in stock while raising the dividend every year during his tenure; all while continuing Target’s commitment to dedicating 5% of its total profits to communities, which it has done without break since 1946.
Cornell’s prescient, industry-leading strategy to invest in stores in 2017 to build them into e-commerce fulfillment hubs paid off massively, enabling exponential e-commerce growth at Target, especially early on during the pandemic, with consumers embracing Target’s same-day home delivery and drive by pick-up service. This business, which was virtually built from scratch, now generates $20 billion a year and is still rapidly growing. Derived from Target’s burgeoning e-commerce platform is Target’s digital advertising business, which now generates $2 billion a year for the company and is still rapidly growing as well.
At the same time, the complexity of running stores as distribution centers has created gaps in the store experience, and Target needs to provide consumers with a more premium, consistent shopping experience. Fiddelke will need to navigate a challenging road forward for Target, which has seen sales stagnate since peaking three years ago. Target has a higher mix of consumer discretionary products vis a vis competitors such as Walmart and Costco, whose product mix lean more towards consumer staples. This benefits Target when its merchandise is trend setting and differentiated, but can also be a headwind when consumers are stretched or managing budgets tightly. Fiddelke’s emphasis on restoring Target’s style authority may be the biggest factor in driving future growth here. Regardless, there is just no mistaking the magnitude of Target’s current challenges.
To succeed, Fiddelke will need to put forward a comprehensive turnaround strategy as 2026 beckons, with the planned CEO transition looming in February 2026. Consumer spending is showing signs of slowing down amidst market share losses to key competitors, and Target will need to do a better job of both providing value to the financially stressed consumer; while also better differentiating its discretionary products to recapture higher spending consumers. Target needs to recapture its reputation for combining style, quality and value in a way other retailers don’t.
There are some potential growth enhancers. While Target’s loyalty program, Target Circle, has over 100 million members; investors will be looking to see how Fiddelke can better leverage those memberships. Unlike Walmart or Amazon, Target Circle is free to join, and there is a big opportunity for Target to increase the offerings and value to attract more consumers while further monetizing the platform. Target has been testing different promotions, personalized offers, gamifying rewards, free gifts and working to increase awareness of the benefits, with a focus of driving upper-level paid premium memberships that come with 5% discounts on purchases and unlimited same-day home delivery. These initiatives have the potential to not only accelerate digital growth but also drive overall traffic and sales growth. Similarly, there is a significant opportunity for Target’s third-party marketplace business, Target+, which enables outside vendors to sell products on its website with attractive profit margins to Target, to grow significantly in the years ahead.
Fiddelke appears to be meeting these challenges head-on. Virtually all observers agreed that the recent news of Target laying off 8% of its corporate workforce was difficult but necessary in rightsizing Target’s workforce. Analysts at Jefferies noted, “This is an early signal that Fiddelke is willing to make tough calls. The layoffs are essential to restore agility and cost discipline. If paired with initiatives to reignite traffic and improve digital execution, these actions could lay the groundwork for a turnaround”. These initial green shoots of progress have been warmly welcomed, with Target stock up nearly 10% over the last month. Furthermore, Target is continuing exclusive premiers with blockbuster talent like Taylor Swift, who just released her new “Life of Showgirl” album with exclusive related merchandize items available only at Target, continuing a highly profitable enviable relationship since 2008.
But that marks only the start, and much more is needed. To sustain momentum, Target will need to communicate an even more sweeping, comprehensive turnaround strategy covering all aspects of Fiddelke’s new strategy in detail, perhaps around a potential investor day next spring. Clearly, there is strong appetite for bold, decisive moves, even if it means ripping off the band-aid right up front and working through some transitory pain. Then, from there, all eyes will be on execution. While our original analysis suggests that internal CEOs tend to have stronger track records of execution, the onus will be on Fiddelke to show that this leadership team of experienced Target veterans can hit the bulls- eye once Target’s target is in sight.
The viewpoints presented in Coins2Day.com commentary articles represent exclusively the perspectives of their authors and don't always align with the sentiments and convictions of Coins2Day .