Nestled inside Target's Minneapolis headquarters, racks of unfinished clothes line the walls. In another area, sketches and splotches of color are hung up for inspiration. Walk down the hallway, and it looks like you've arrived at an HGTV set with bedrooms, living rooms and kitchens on display. This is the creative hub of Target's in-house brands — a key part of the retailer's turnaround.
Scattered throughout, there are chemical mixing labs and an alcove with a handful of 3-D printers. About 550 employees work together to bring roughly 40 private labels, such as Goodfellow & Co. for men's clothing and Up & Up for cleaning supplies, to life.
Meetings take place around a dining table in Target's Made By Design room, which is decked out with kitchen appliances and other utensils from that label. And "Targeters," as they're sometimes referred to, arrive back from fashion shows or visits to overseas shops, toting items they've collected on their journeys. Each week, so-called kid influencers are ushered in and out of the Cat & Jack room to offer feedback on clothing styles being developed for the coming year.
The work taking place throughout this creative space has been key to Target's latest successes, putting the company in a stronger position following a sales slump in the early 2000s that drove Target into somewhat of an identity crisis. Battling names such as Walmart, Kroger, Kohl's and increasingly Amazon for market share, Target started to drift away from its fashion and design roots — its "cheap chic" heritage — in the wake of the Great Recession, which thrust many businesses into a rut late in '08 and '09.
But as the economy improved, shoppers didn't return to Target in droves. One reason for this was the company had lost what was so special about it — what made shoppers pronounce its name with a faux French accent. CEO Brian Cornell joined the retailer from PepsiCo in 2014, vowing to fix those issues. He eventually announced a plan in February of 2017 to invest $7 billion through 2020 to get back to the "Tar-Jay" days. The plan is working, but with many milestone investments behind it, Target will now have to prove it can keep the momentum going and keep growth stable in the coming years.
Investors initially resisted Cornell's strategy, welcoming the news with the biggest sell-off of Target shares in nine years.
"Investors beat the crap out of Target [at the start], but when the comps start to turn and the stock doubles, you end up being fine," Stacey Widlitz, president of consulting group SW Retail Advisors, told CNBC. "Lucky for them the investments were the right investments and in the end they paid off."
Target shares have gained more than 37 percent from Feb. 28, 2017. That compares with the S&P 500 Retail ETF (XRT), which has traded up just 13.5 percent over the same time period.
When Cornell walked investors and analysts through his plan, he said 2017 and 2018 would be about investing and 2019 would be centered around returning to stability and growth. Key to the turnaround thus far have been the rollout of new in-house brands, such as Cat & Jack, which helped the company earn back its "Tar-Jay" nickname. Store renovations, which are ongoing, are also helping drive shoppers back into stores to see what's new. While Target hasn't mastered every category — grocery still needs work — the company is laser focused on ultimately creating a better shopping experience. This includes investing in more delivery options.
"Skeptics thought he wouldn't be able to do it, but he's proven them wrong," said Robin Lewis, consultant and author of the Robin Report. "He has proven to be a turnaround leader."
The retailer is coming off a quarter where it reported "unprecedented" growth in foot traffic at its stores, along with the strongest same-store sales growth in 13 years. It attributed that success to both strong macroeconomic factors — low unemployment and strong consumer confidence in the U.S. — and its investments paying off.
Retail analysts agree Target's in-house brands for everything from iPhone accessories and bedroom curtains to sneakers are giving the company an identity again — a way to stand out from Amazon, Walmart, Kroger and others.
Still, there's some skepticism from the financial community that Target's investments will continue to weigh on profit margins. More pressure on the bottom line could drive the stock lower in the coming years. But if Target can prove those pains are easing as sales rise, shares should continue to climb. Target needs to prove it can run a profitable business both from its stores and online.
"I think about the work we did years ago with Cat & Jack — thinking about how important it is for us to connect with babies, kids, with those moms," Cornell told CNBC earlier this month from inside one of the retailer's recently remodeled locations in downtown Minneapolis. "And now we've taken some of that learning, and the team's just gotten better and better."
The company has rolled out 17 of its own brands, including A New Day for women's clothing, Heyday for electronics accessories, and Opalhouse for whimsical home decor, since the start of 2017 and is on track to add eight more by the end of 2019. Cat & Jack, arguably one of the retailer's most well-known brands today, reached $2 billion in sales just one year after its launch in 2016, selling trendy clothing for kids.
"We feel great about ... the new brands that we've launched, but we're going to do a lot more in '19 and '20," Cornell said.
For Target, these in-house brands and one-on-one collaborations with popular names such as Hunter and Lilly Pulitzer, more recently, also help fuel profit margins and give the retailer more control over inventory in stores. This has been especially important as Target pours more money into its supply chain to speed things like online delivery, which weighs on the bottom line.
"Now we're back to Tar-Jay," Moody's analyst Charlie O'Shea told CNBC. "As a retailer today, you have to give the consumer a reason to come into your store or click on a website, and exclusive brands are No. 1 in that process. I would guess that Target's brands so far are doing better than the company thought they would."
Target's stores are starting to look a lot different — another boost to keep the momentum going. Like the popular Cat & Jack brand, the remodeled stores are giving people a reason to shop there over the competition.
Target has said this year it will remodel about 300 stores out of its fleet of 1,800 and is on track to complete 1,100 remodels by the end of 2020. It said it typically sees sales climb between 2 and 4 percent at remodeled locations.
The company is meanwhile opening smaller-format stores in urban markets, such as New York, and near college campuses, like in Chapel Hill, North Carolina. It currently has 26 of those smaller shops across the U.S. open for at least 13 months. These stores saw high-single-digit comp growth, on average, during the latest quarter, Target said.
"It's like a mini Macy's, but with better prices," one shopper said as she strolled through a newly remodeled Target store in Maple Grove, Minnesota, last month.
Target's remodeled stores will have fewer aisles in the beauty department. Instead, there is a counter where a specialist lets shoppers try on items before they buy, similar to the experience one might find at Ulta or Sephora. Within the apparel category, the stores put Target's own brands on display front and center. There are more mannequins scattered across the floor encouraging customers to shop whole looks instead of individual pieces.
Certain parts of the store have even shifted — maternity clothing is now next to where Target sells car seats and diapers, for example. And about 100 stores so far have received a complete facelift in the toy department, which includes life-size games and other things for kids to play with in stores, as they shop. Those stores also have a redesigned area selling children's books, which is now near where the company sells kid's clothing, instead of next to electronics. The carpeted spaces are more inviting for kids to come in, sit and read a book while their parents might be shopping a few feet away.
The goal of the remodels, according to the company, is to make each category of merchandise — be it electronics, home decor or grocery — feel like it's housed within a separate "boutique" within Target.
Associates in stores are meanwhile being trained to be "specialists" within certain departments, offering shoppers more knowledge on what they're shopping for. Employees assigned to beauty, for example, are asked to keep up with the latest trends in makeup. And Target has provided new training courses within the handheld devices that it gives workers to do this.
To be sure, the retailer hasn't yet mastered every department within its stores. It arguably still lags behind its peers in grocery.
"In terms of individual products, Target's grocery proposition is not bad," GlobalData Retail Managing Director Neil Saunders said. "However, when taken as a whole the offer is murky: it has neither the sharp prices of Walmart or Aldi, nor the quality and sense of experience of Whole Foods, Wegmans or Trader Joe's."
The company is still making changes to its food offering, though the changes haven't been as extensive as those in apparel and home. It's offering a wider selection of prepared food options, such as grilled chicken strips and precut veggies, in stores. Within the past year, the company said it started delivering fresh grocery items such as avocados and apples to stores daily, as opposed to on a less-frequent basis, to try to cut back on stale food sitting on shelves.
"I understand they don't want to be a destination grocery store," O'Shea said. "But a better food business would improve the business overall, and it could get more people in the stores."
Part of Target's latest efforts to improve a customer's experience while shopping for groceries, along with other everyday essentials, includes its $550 million acquisition of delivery platform Shipt. The deal gave Target access to Shipt's network of personal shoppers, who are assigned to walk Target's stores, pick up any items on a customer's list and then make same-day deliveries. Customers must pay an annual fee of $99 to use the service, but Target said Shipt's membership base has tripled since the deal went through.
The company has also aggressively been adding services such as curbside pickup and buy online pick up in store, to make shopping and schlepping bags full of items as painless as possible. These options for shoppers will be critical this holiday season, when consumers are expected to be spending more than they were last year.
"If we go back five or six years ago, our Target stores served one role: a place you can shop," Cornell told CNBC. "Today, they are at the center of our strategy. You can place an order online from your desk and a couple hours later it's ready for you to pick up ... or drive up in the parking lot. Our stores are now fulfillment centers for us."