Target plans more small-format stores in downtown locations. Image source: Target.

Coming off a quarter in which Target (TGT -1.55%) reported that fewer shoppers visited its stores, CEO Brian Cornell has a plan to turn around his company.

The chief executive shared some of his ideas on Sept. 14 at Target's annual meeting. Cornell has his work cut out for him, because not only did the chain report that foot traffic in stores was down 2.2% in its latest quarter, but comparable sales dropped by 1.1%.

When the company announced its Q2 2016 earnings, Cornell offered a message about his plans for the future.

"Looking ahead, we remain focused on our enterprise priorities as we continue to see the benefits of investing in Signature Categories, store experience, new flex-format stores and digital capabilities," he said. "Although we are planning for a challenging environment in the back half of the year, we believe we have the right strategy to restore traffic and sales growth over time."

At the annual meeting, the CEO offered more details as to exactly what path Target plans to follow.

Small stores are key

Early in 2016, Target rival Wal-Mart (WMT -0.10%) closed all of its small-format stores. In theory, those locations were supposed to let the retailer operate in places where a full-size store would not make sense. That could have been for a variety of reasons ranging from cost of real estate in a city setting or population in a more rural area.

Despite Wal-Mart abandoning the format, Target plans to continue growing its small-store portfolio, Cornell said during the annual meeting, Bloomberg reported. Target already has 23 small-format stores operating in larger cities and plans nine more this year and at least 16 in 2017. Coming in at less than 50,000 square feet, these smaller locations allow the chain to operate in downtown locations where a full-size store would be cost-prohibitive.

Cornell noted during the meeting that eventually the company could have hundreds of these smaller locations that can also serve as locations for in-store pickup of online orders, according to Bloomberg.

Groceries are part of the answer

Cornell, who has a background in groceries, believes that his chain is actually on the right track when it comes to its offering. Instead of being a full-service, everything-to-everyone grocer, Target wants to focus on organic, natural, and gluten-free foods while also offering attention-getting items like craft beer.

The CEO believes that he has made the right moves, but that the public has not noticed yet. "It's just going to take time for us to get credit for those changes," he said during the national meeting, Fortune reported.

To help raise awareness, Target has begun putting more focus on groceries in its weekly circulars and has begun tweaking store displays.

Target has a ways to go

Part of Target's Q2 problem came from the customer boycott over its decision to allow people to use the bathroom of the gender they identify with rather than their birth gender. The company has partially addressed that by committing to add single-person bathrooms to all its stores, but it's possible that a small percentage of its audience may not come back due to its stance.

Aside from that, though, Target's big problem is Wal-Mart and, to a lesser extent, Cornell is playing smart when it comes to his big physical-store rival. By adding small stores and differentiating its grocery offering, Target is setting itself up as a clear alternative.

Going higher end with groceries and opening up hip stores in downtown locales also reinforces the "Tar-Jay" higher-end image, which can separate the company from its more mass-market rival. None of these moves will pay off quickly, but Cornell has a plan and in the long run it should help him build back sales and maybe earn new customers.