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With Shares Up 93%, Target’s Turnaround Suggests Powerful Investment Strategy

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In 2014, Target was in trouble. So it hired Brian Cornell, its first outside CEO. Over the last five years, his turnaround strategy – which featured an $8 billion investment announced in February 2017 – has nearly doubled its stock.

For bold investors, this success story supplies a simple – if risky – investment strategy: when a public company announces a huge investment to boost its competitive position, investors will hate the idea and dump the shares. The strategy is to buy on the dip.

While that approach worked for Target, the key to getting greedy when fear prevails is whether you believe the CEO can transform the company’s strategy and operations to win more customers and keep them buying. Cornell did just that.

(I have no financial interest in the securities mentioned in this post).

Target Hires Outside CEO

Cornell took over in mid-August 2014. The peripatetic veteran of Michaels, Sam’s Club and PepsiCo, grabbed the reins as Target was barely growing, struggling to recover from a massive consumer data breach and distracted by a disastrous expansion into Canada.

Cornell was popular with investors due to his initial moves to jettison businesses that he thought did not fit with Target’s corporate strategy. For example, he shuttered the Canadian operations and sold Target’s $4 billion pharmacy business to CVS Health, noted Fortune.

As Charlie O’Shea, an analyst at Moody’s, explained in an October 15 interview, when it came to Canada, “Cornell ripped the band aid off. Canada should have been a great opportunity for Target but instead of expanding gradually after learning the local market which is what helped them succeed in the U.S., in Canada they opened too many stores at once. They wanted to prove to the world that they could do something different.”

Cornell’s Bold Bet Draws Wall Street’s Bronx Cheer

But getting rid of failing businesses does nothing for a company’s revenue growth. For that, a company needs to invest in growth opportunities. And Cornell created and sold Target’s board on a package of store improvement and other initiatives that would require $7 billion in capital spending and $1 billion in operating expenses over three years, according to the Star Tribune.

On February 28, 2017, Cornell announced this investment along with a terrible earnings report featuring below-forecast earnings for the final quarter of 2016 and a much worse than expected outlook for 2017.

Target shares plunged 13% to around $58, according to CNN, as investors signaled their disapproval with its terrible results and outlook coupled with a big investment in stores when everyone knew that ecommerce was the future of retail.

If you’d bought Target stock after that record plunge, you’d be sitting on a 93% gain today. Its investment has paid off in two years of steady growth. As of the third quarter of 2019, Target had reported “eight straight quarters of comparable sales increases...growing faster than rivals such as Macy’s, Kohl’s, and Walmart,” noted Fortune.

Inside Target’s Turnaround

That $7 billion investment went to a blend of fundamental changes and a return to Target’s roots. The fundamental changes were offering what the industry describes as omnichannel – which means that consumers can shop, purchase, and take possession of goods any way they want.

In 2017, Target acquired Grand Junction, a software-based solution for retailers, distributors, third-party logistics providers, and consumers. As Ben Gordon, whose firm Cambridge Capital invested in the company explained in an October 18 interview, “Grand Junction gave Target the opportunity to provide customers an alternative to Amazon Prime.”

And in December 2017 Target added to its omnichannel offerings by paying $550 million to acquire $99 subscription same-day delivery service Shipt – which by March 2019 was available in 1,500 stores.

And that month, consumers could order online and pickup at the curb in more than 1,000 stores, according to the Washington Post, which reported that using the stores as fulfillment centers costs Target 90% less than at warehouses.

As Tory Gundelach, VP of Retail Insights at Kantar Consulting, explained in an October 16 interview, “Omnichannel means consumers can do business with Target through bricks and mortar, online, voice, and mobile [among others]. To do this effectively, Target‘s front-end technology personalizes a customer’s experience so [she gets the] same message across all channels.”

This also requires changes in the so-called back end of the business. “Target has seven different fulfillment methods. [To execute well, Target] coordinates across the supply chain, logistics, fulfillment, and team members who pick and pack orders in the back of the store for curbside pickup and stack the store shelves.”

Another new element of Target’s strategy is its 100 small stores in urban locations – these stores give Target access to customers in places where Walmart does not operate. The small stores generate nearly $900 in annual sales per square foot – about three times the figure for a typical suburban store.

The return to Target’s roots manifested itself across the board. Target articulated its mission – “to help all families discover the joy in everyday life” – which inspired and empowered more of its 320,000 workers.

Target also refreshed its stores by getting rid of linoleum floors and displaying clothing on mannequins (it expects to do that for 1,000 of its 1,800 stores by the end of 2020), improved how it displays items to shoppers.

The company also brought back “Tarzhay” – its blend of private label – such as ts high margin $2 billion revenue children’s line Cat & Jack – and only-at-Target exclusives made by other companies. Collectively accounting for about 30% of sales, Tarzhay “gives shoppers a reason to come into its stores,” noted Gundelach.

Those shoppers tend to be younger and wealthier than those at Walmart. Prosper Insights & Analytics, notes that the average Target shopper is 42.5 years old and sports a household income of $77,610. That’s 3.5 years younger $13,408 richer than the average Walmart shopper.

Sources of Future Growth

Can Target grow faster over the next few years? To do that, it will need to adapt quickly to changing customer tastes, new technologies, and the rise and fall of its rivals.

One such opportunity is picking up customers from retailers that have been cutting back stores and filing for bankruptcy. Target added customers from bankrupt rivals like Gymboree, the Sports Authority, and Toys “R” Us, according to WCPO. And in 2016, when Victoria’s Secret stopped selling most of its women’s swimwear, Target took nine months to launch its own women’s bathing suits – and now leads the U.S. there, according to WWD.

Ultimately Target’s ability to sustain its growth depends on how quickly it can identify and capture new opportunities. To do that, Target has the advantage of taking its cue from customers and being “data driven” rather than imposing its vision from the top-down as JC Penney did, explained Sucharita Kodali, Forrester Research Vice President and Principal Analyst, on October 15.

Target – which received a Glassdoor rating of 3.4/5 from 34,000 reviews – has room for improvement when it comes to employee engagement. Despite paying workers higher wages, some of them “say the chain has cut their shifts, costing them pay, endangering their eligibility for the company’s health insurance coverage and making it generally more difficult to do their jobs properly,” according to RetailWire, which noted that Target has “pledged to raise its minimum wage to $15 an hour” by the end of 2020.

Target also has room for improvement when it comes to produce. One of my students said October 16 that he found its produce to be sub par – especially compared to the much higher quality produce that Walmart supplies.

To be fair, Target is rolling out a new private grocery brand – Good & Gather – that will feature “more than 2,000 items without artificial flavors and sweeteners [as it phases out] stalwart private food brands Archer Farms and Simply Balanced,” according to Bloomberg.

And a Target spokesperson says that Food and Beverage is “a big reason our guests like shopping and we've been seeing consistent growth and market share gains in Food and Beverage for well over a year.”

Several others love Target – one noting that it’s a social event for her and her friends and another who praised the store as a one-stop shop that is “very clean and organized.”

Buy Target Stock?

One analyst is optimistic about Target. Last month, Credit Suisse analyst Seth Sigman estimated that $9 billion in sales is up for grabs due to recent store closures by rivals. Sigman believes that Target’s positive sales growth reflects its ability to gain market share due to its “newly announced loyalty program, and robust omnichannel offerings,” according to Barron’s. He also sees Target’s gross margins rising in future quarters.

If Target keeps surprising on the upside, its stock could rise more. But what interests me more is the strategy of picking up shares of retail goliaths after they announce big bets like Target’s to fight back against aggressive upstarts.

If such bets have a reasonable chance of success, they could pay off for risk-seeking stock buyers.

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