Can Target's New CEO Re-Energize the Big Retailer? A detailed look at Brian Cornell's new approach to a process-heavy company.

The Target executives were taken aback. They had just learned that their new CEO, Brian Cornell, had been out on his own with customers, incognito, exploring one of the company's stores. It was a big departure from the way the process-heavy discount retailer had always operated. Store visits, ostensibly intended as intelligence-gathering missions, were meticulously planned affairs, only slightly less formal than, say, a presidential visit. Every relevant national manager and local functionary would be notified in advance, each step choreographed, the "regular shoppers" handpicked and vetted. About the only thing missing was a brass band playing "Hail to the Chief."

But on a mid-October day, just two months after he took the helm, Cornell took an unannounced detour from a business trip to Dallas. A friend connected him with an assortment of seven local moms, each of them loyal Target customers. Unrecognized by store workers, Cornell deployed each member of his ad hoc focus group to the department she frequented most—clothing, housewares, or groceries, for example—then waited for their reports.

What Cornell sacrificed in pomp and circumstance, he made for up in candid opinions. The shoppers had a bevy of comments and complaints. Two Latina mothers criticized the bland colors and general drabness of Target's apparel. The younger moms told him that they buy only organic food for their babies; they wanted greater selection. By the end of his two hours in the store, Cornell had some germs of what only a few months later, as we'll see, are significant changes he is planning.

It may seem like a small step. But Cornell is the first Target CEO to be recruited from outside the company, and fittingly, he is already bringing a jolt of fresh energy to the country's third-largest retailer (behind only Wal-Mart and Costco). "I got such great, genuine feedback from them," Cornell says of the Dallas visit. As he puts it, providing advance warning ensures stores are "going to be beautiful—but it's not reality."

A firm grip on reality is only the beginning of what Target needs today. A company that became a national phenomenon with retail alchemy—a rare ability to attract millions with hip designer items at clear-out prices—has seen that delicate formula stifled by excessive caution and a strangling bureaucracy, even as competitors emulated Target's approach, and fast-fashion retailers like H&M, off-price chains such as T.J. Maxx, and dollar stores all muscled onto its turf.

Instead of cultivating its cachet as competition mounted and the economy struggled, Target instead emphasized low prices and unimaginative products.
The doubly deadly result: The retailer is no longer winning on style or on price.

Target is drawing fewer shoppers. As of December, 37% of Americans had browsed in a Target store or its website in the preceding four weeks, according to data from Kantar Retail. In December 2007 the equivalent figure was 53%. That means millions of shoppers have abandoned Target. Despite the exodus, sales have ticked up during the past few years; Target is on track for $73 billion in 2014. What that means is that the company has become increasingly reliant on its core customers. It needs to attract fresh ones if it wants to reignite its growth.

Then there's the value equation. In December 2007, Target scored a 48.4 on a scale that measures shoppers' sense that they get their money's worth, as compiled by YouGov BrandIndex. As of January 2015, that number had plunged to 31, erasing the company's long-standing edge over rival Wal-Mart.

Those are the disconcerting trends for the long term. Then there were the company's straight-up whiffs. A massive hacking in 2013 enraged customers. The company's subpar web presence left it gasping to catch its rivals. And finally it bungled its expansion into Canada in disastrous fashion.

That array of woes has steadily chipped away at Target's profits. Earnings, which peaked at $3.2 billion a decade ago, are expected to be $1.5 billion for 2014. Net income as a percentage of sales has fallen from 4.5% to 2% during the same period, according to S&P Capital IQ, and gross profit margins have slipped.

That's the situation facing Cornell. A former senior PepsiCo executive and CEO of Sam's Club, he has made a name for himself in the retail world with a seemingly contradictory set of traits: He's a dyed-in-the-wool data guy who likes nothing more than nosing around a store and getting a feel for what's going on.

Since taking the reins in August, Cornell, 55, has moved quickly, seeking to speed up Target's metabolism. He aggressively squeezed Amazon and Wal-Mart by offering free shipping for online orders during the holidays. That decision was made in a matter of days rather than the months it would have taken in the past.

The new CEO's most dramatic step so far: He ripped the bandage off Target's Canadian wound, a failed 2013 initiative that left the company bleeding. Closing all its stores north of the border cost $5.4 billion, but it stanched a key source of losses and will help the company concentrate on its U.S. business. Cornell's decisiveness, along with a better-than-expected holiday-season increase in sales at the website and stores open for at least a year, has revived Target's stock: The shares have jumped 30% under the new CEO, to all-time highs.

Cornell knows the plight of retailers that can't adapt, and he's the first to acknowledge that Target has a lot of work ahead. A key element will be improving the company's focus, which is CEO-speak for exiting or paring back certain business lines. "The categories we're going to stand for," he says, "the ones I call our signature categories—they're the ones that can differentiate the brand going forward. So you'll see us elevate our focus around our style categories, apparel, home, beauty—critically important categories for our guest—and we think we can differentiate in that space." He also wants to "localize" Target's product mix. The company plans to follow its customers as they move back to cities, with new urban locations that are smaller than its 1,800 big boxes, and stop playing catch-up when it comes to digital.

Most of all, Target knows it needs to recapture its elusive ability to seduce. But as many a retailer (and many a teenager) has learned the hard way, wanting to be cool is a lot easier than actually being cool.

Up by his bootstraps

When Cornell arrived at Target's headquarters in Minneapolis, he was installed in the newly redone CEO's corner suite on the 26th floor. Almost immediately he insisted he be moved to a smaller office down the hall that is only steps away from the company's global data nerve center.

That's the company's mission-control-style monitoring room, which it calls "guest central." There a team of 10 staffers scrutinizes live feeds from social media sites such as Pinterest, Facebook, and Twitter, along with television stations, on nine large TV screens high on the wall. They watch intently and use software to aggregate data to gauge by-the-second reactions to a product launch or news
announcement or to respond quickly to, say, a customer fulminating on Twitter.

The social command center existed before Cornell became CEO. But he has beefed up its capabilities, and he's looking for creative ways to use the data. He drops in every morning and insists on two updates a day.

Analytics have long been a central part of Cornell's approach. When he headed Sam's Club, the $55-billion-a-year Wal-Mart division, from 2009 to 2012,
he improved the unit's customer-insights system, according to Maggie Nation, a marketing executive at Sam's under Cornell. The effort yielded such good results that Wal-Mart had all of its insights teams report directly to Cornell.

Cornell had previously upgraded analytics at Safeway, where he was chief marketing officer from 2004 to 2007. That data helped him ramp up the grocer's successful Lifestyle stores and led him to add higher-end touches like softer lighting, hardwood floors, and sushi bars. Cornell also loved to walk around stores, says Stuart Aitken, who worked under him at two companies. Cornell would grill customers about such minutiae as store lighting and which signs were hard to read. He would often take the clues he gathered in those conversations and use the analytics to look for broader patterns that would reveal problems or opportunities.

Cornell's emphasis on analytics appealed to Target's board as it looked for a new CEO, according to the director who oversaw the search, Roxanne Austin, head of Austin Investment Advisors, a private investment and consulting firm. Cornell also boasted a track record of building private-label brands, a priority for Target, and had a reputation as a leader who could rally the troops and change a culture. All of that trumped his inexperience in three areas that will be crucial to determining whether Target can get its mojo back: home goods, e-commerce, and clothing. (Cornell is trying to catch up: He was the first Target CEO to hobnob at New York Fashion Week in September.) "No one else had this set of experiences," Austin says. "He was the perfect guy."

Brian Cornell's childhood was anything but perfect—or easy. His parents split up early, and Cornell was only 6 when he last saw his father, who died young. Cornell's mother suffered from heart disease through much of her life, and the two of them lived very modestly off her disability check in working-class White-stone, Queens. Eventually his mother's health declined to the point that Cornell's grandparents became his main caregivers. From the age that he could first make himself useful, Cornell says, he did odd jobs in his spare time: shoveling snow, mowing lawns, stacking bricks. "I always had to work to fill in the gaps," he says.

As a teenager he spent summers cleaning trucks at a Tropicana distribution center near his home. Other retail jobs, along with gigs coaching high school football, helped him pay his way through college at UCLA. (Among the few objects displayed in Cornell's spare, immaculate office is an autographed UCLA football helmet from fellow alum and Dallas Cowboys legend Troy Aikman inscribed "From one QB to another.")

"I had to scramble and scratch for everything I have," says Cornell. Even today, he says, "I probably still wake up every day wanting to make sure I don't end up battling some of those same things I did when I was a kid," and adds, "I'm still my toughest critic." Despite all that, Cornell is approachable and genial, though he listens with an intensity that is almost alarming.

"Intense" also applies to Cornell's workout regimen. It's not rare that a CEO would be found every morning at 7 a.m., as Cornell is, in the gym at company headquarters, on the treadmill as he fires off emails from his iPad. What's unusual is that on most days he returns to the gym for a second session after work. About 15 years ago Cornell attended the "corporate athlete program" at the Human Performance Institute, making him a zealot for optimizing performance not only with exercise but also with adequate sleep.

Cornell isn't the type who exalts the machismo of outlandish hours. Just the opposite. It's not unusual for him to inquire about a colleague's workout habits and make specific recommendations. Laxman Narasimhan, CEO of PepsiCo Latin America Foods, says his former boss would gently chide him to shoot for 200 minutes of exercise a week, extolling the sound mind he said stems from a sound body. He says Cornell encouraged him to take time for fitness on their business trips.

Cornell was always ambitious. But from the outside, he looked like a corporate lifer, spending 20 years ascending inside Tropicana and then its subsequent owner, PepsiCo. But his
impatience to land a major CEO position eventually set him in motion. He began hopscotching through a series of senior positions at different companies.

Cornell worked at Safeway from 2004 to 2007 as chief of marketing, as CEO of Michaels Stores from 2007 to 2009, then as CEO of Sam's Club. At each stop he expanded the chain's house brands. At Sam's Club, Cornell helped reverse a sales decline and made it the fastest-growing division of Wal-Mart. Cornell was briefly viewed as a contender to succeed Mike Duke but left in part because his wife never cottoned to life in Bentonville, Ark.  Cornell returned to PepsiCo in 2012 to head the Americas operations for Frito-Lay and other foods. He was whispered about as a potential PepsiCo CEO. But when Target called, he didn't hesitate. As he puts it, "It's a dream job."

The rise of cheap chic

Target's history turns on two well-timed decisions. The first was the realization by Dayton's department store that customers were flocking to the less expensive wares it was selling in its basement. That was the genesis of Target, in 1962, a year that also saw the birth of Wal-Mart, Kmart, and Kohl's. Wal-Mart in particular would cast a shadow over its smaller rival. By the late 1980s its low prices were squeezing Target. That led to the second crucial decision, in the mid-1990s. Target could set itself apart by offering something its rivals didn't: clothing and kitchenware with panache and low prices. (Excellent marketing didn't hurt either.)

By 1999, Target had attained a chic that was nearly inconceivable for a discounter. It launched the first of what have so far been 150 collaborations with leading designers, offering teakettles by renowned architect Michael Graves. Later collections, with Isaac Mizrahi in 2002 and Italian fashion house Missoni in 2011, were smashes, too, and established such offerings as Target's signature strategy.

The Great Recession threw the company off its stride. Being trendy seemed like an indulgence in a time of depressed wages and underemployment. Target's marketing began echoing Wal-Mart's dogma of frugal prices rather than fun and flair. Target cut back the shelf space it was devoting to unique, unproven merchandise—whether it was home goods or clothing—and reduced the quality of some of its apparel to keep costs down. Meanwhile, Macy's, Kohl's, and H&M were imitating the company with their own designer collaborations.

Target was standing out less and less. To generate visits the company added more groceries, but without any distinctive touch to set it apart. By 2013 food, a notoriously low-margin business, had grown to a fifth of its revenue. Target had concentrated too much on the "pay less" part of its mantra and not enough on the "expect more" part.

Then came two epic corporate wipe-outs. Target's move into Canada was a fiasco. Rather than launching new stores in carefully selected spots and building slowly, Target acquired 124 locations in 2013 in one fell swoop by buying all the outlets from a defunct discounter called Zellers. Never mind that one of the causes of Zellers' demise was the poor location of its stores. Or that the spaces were designed to enable a different strategy from Target's. Throw in supply-chain problems that yielded empty shelves and high prices, and it added up to an unmitigated disaster.

Then there was a second calamity. In the final days of the 2013 holiday shopping season, Target disclosed that hackers had obtained as many as 70 million customer records. Though such intrusions seem to occur almost daily today, at the time it was the worst retail hacking in history. Customers were livid. They punished Target, and business slowed well into 2014.

By that spring the pressure had built, and something had to give. As often happens, it was the chief executive who gave. In May 2014, Gregg Steinhafel, a superb merchandiser who'd been integral to Target's rise but stiff and cautious as CEO, resigned.

Corporate soul-searching

While the confluence of the data breach, the Canadian disaster, and Steinhafel's departure was traumatic, it may have been the shock Target needed. CFO John Mulligan, who was named interim CEO, started a four-month corporate soul-searching effort. "The truth is, we haven't kept up," Mulligan told staff in an email on May 6, the day after Steinhafel left. "We've got to fight harder to give our guests what they want."

Target intensified efforts to improve its second-rate website. Its capabilities had fallen behind those of Wal-Mart, which had the capacity to use a big chunk of its stores to help fill online orders a year before Target did. The company rewrote three-quarters of the code for its website and has now caught up to, or even surpassed, some rivals. Target's Cartwheel coupon-tracking app is now considered an industry leader, downloaded 13 million times, and has generated $1 billion in sales so far.

Under Mulligan, Target took symbolic yet practical steps, such as consolidating its top executives on the 26th floor of its headquarters to make it easier to talk to one another. Target relaxed its dress code last March, elating the staff by leaving sartorial decisions largely to common sense. (Even in the company's most formal days, there was a standing exemption for any shirt in Target's signature red worn with khakis.)

Cornell has loosened the atmosphere in other ways. He eats in the company cafeteria, where he mingles with staff. He opened Target's annual fall meeting to the press for the first time. The company has set up a lounge on the executive floor where employees can check out what merchandise is in the pipeline and swap ideas in a relaxed environment. And the company, long populated by lifers, is redoubling efforts to recruit outsiders with fresh ideas.

"It's not that we became insular. We were insular," says Jeff Jones, Target's marketing boss. "If you need to go faster, you need people who've done it. We didn't have enough people who'd done it before."

Cornell certainly qualifies as an outsider, and his resolution of the Canada question showed the speed of his decision-making. The fate of the operations was sealed when the CEO made a solo journey to some Montreal-area stores the Saturday before Christmas, the busiest day of the season in retail. As Cornell wandered among the empty aisles, he peppered his CFO with texts. He concluded that painful as it was to admit, it would take too much time and treasure to fix the Canadian operation. Less than three weeks later Target announced it was shuttering all its stores there.

Three years or bust

It's early February and Cornell is back in a Target again. As he strides through its outlet in northeast Minneapolis, which doubles as its "living lab," he points out how Target is displaying its kitchenware. Rather than plates, mats, and utensils stocked separately, they are presented together in realistic kitchen and table settings. The idea is to help customers imagine mixing and matching items in the way that countless retailers have been doing for decades.

It seems symbolic. The CEO is a whirl of ideas and initiatives, but most of them appear incremental and one or another of its rivals has some version of most of them. For example, Target is trying out a new "first impressions" area at the front of a few stores, looking to highlight choice items, such as an elegant soup bowl, in an appealing presentation. It would be a step up from the bins with $1 tchotchkes that currently welcome shoppers. And Target is taking electronics like iPads out of glass cases so that customers can try them out. (One plan that seems more unusual: Target is testing a service in which a brand-agnostic staffer will offer advice to parents of infants. The baby and maternity category is essential to capturing the next generation of shoppers, he says, and defines a group that visits Target stores most often.)

Cornell acknowledges that "there's nothing we're talking about where someone's going to say, "Wow, I've never seen that before.' " But, he says, "from a Target standpoint, they've never seen us bundle these key initiatives." And, he argues, "they will add up to a very bold change for the brand and the business … If we execute the plan over the next few years, you will say, "Boy, Target made a huge transformation.' " He's giving himself and his team three years to deliver.

The first TargetExpress in Minneapolis with food on display.

The CEO plans to focus on categories in which Target believes it can win and trim elsewhere. (In February, for example, he pulled the plug on Target's video-streaming service.) That means more store brands. Cornell's Safeway experience is instructive. Early to see the opportunity in organic foods, he was the architect of the grocer's O Organics brand, which took off. Today, mere months after the moms in the Dallas store told him they wanted more organic foods for their babies, Cornell has a goal: He wants organic items to account for 60% of the company's baby food sales within two years, up from 40% now. That would address a key challenge: to make Target's food selection more distinctive.

Cornell is likely to accelerate Target's roll out of its smaller outlets, such as its 100,000-square-foot CityTarget stores aimed at urban consumers. The company is also experimenting with highly customized 20,000-square-foot TargetExpress neighborhood mini-stores, the second of which will open next month in the Bay Area. Of course, Wal-Mart already has 700 small-format (primarily grocery) stores. Walgreens now sells fresh food in many stores, and even Family Dollar is improving its selection. And outside of the food aisles, other retailers and department stores are still on the hunt for the hip-and-cheap sweet spot.

So is Cornell. In November, Target collaborated with Story, a trendy boutique in New York City's Chelsea that creates a new theme every month and changes the look and merchandise accordingly. Just six weeks elapsed from the time Cornell first showed up at Story in September, introducing himself as "Brian from Target," to the opening. In the old days that would've taken many months. Story spotlighted Target brands like Archer Farms, as well as some exclusive products by TOMS and Nate Berkus. It was a way for Target, and Cornell, to keep a finger on the pulse of what's cool.

Should the CEO personally be leading the search for the next hit teakettle? Maybe not. The company may or may not succeed at luring new customers. But Cornell will surely be one of the first to know. He'll be in the aisles, finding out for himself. 

This story is from the March 1, 2015 issue of Fortune.