Can Target’s New CEO Help Turn Around The Company?

Earlier this year, Target (NYSE:TGT) CEO, President and Chairman Gregg Steinhafel resigned from all his positions following the massive data breach last December and the troubled launch of its entry into  Canadian markets. Immediately after his resignation, the company appointed its CFO John Mulligan as interim CEO and stated that this time it will consider outside options for the position of CEO. ^[1] Target finally appointed PepsiCo (NYSE:PEP) executive Brian Cornell as its CEO last week, going outside its ranks for the first time. Cornell, 55, will take over responsibilities as the chairman of the board and chief executive officer on August 12. Target stated that improving the retailer’s performance and developing a sound omni-channel platform will be among Cornell’s top priorities. ^[2]

Interestingly, while Cornell has tremendous experience in retailing, his expertise in areas of fashion and home decor is limited, which made a strong name for Target in the U.S. However, Target’s problems run much deeper than its slipping focus on apparel and home goods. The retailer’s first international venture has been a disaster and the massive date breach has hurt customer confidence. Moreover, sales have been sluggish over the past year and the online business isn’t growing much. Although it is somewhat clear what Cornell needs to do, a lot will depend on the strategies he employs. The one thing he can do to further solidify the company’s position in the U.S. is expand its small store network substantially before this arena gets too competitive.

Our price estimate for Target stands at $67.53, implying a premium of less than 15% to the market price.

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Brian Cornell Must Take a Decision on Canada

In 2011, Target bought 220 Zeller stores for $1.8 billion and spent about $10 million on each store to convert them into its symbolic red and white layout. However, the company’s start was disappointing as its 124 stores opened last year generated only $93 in revenue per square feet with gross margins at a low 15%. Overall, the Canadian segment rendered $1.3 billion in revenues in 2013 and clocked $941 million in losses mainly due to high pre-opening expenses. According to Tiburon Research Group, Target is expected to incur a loss of $600 million in 2014. Though the initial response was good, the company didn’t do too well in terms of customer satisfaction due to significant supply chain problems. Adding to dissatisfaction was the perception that the products were too expensive.  Moreover, due to these supply chain issues shelves were poorly stocked and the retailer was not able to meet customer demand since a lot of products were out of stock. ^[3] In sum, Target’s Canadian stores were seen to be inferior to both the Zeller stores customers had long patronized and the Target stores they knew from cross-border shopping.

Although international expansion was an inevitable move for Target, its approach was questionable. The company was very aggressive in opening stores without a sturdy supply chain to support its needs. The retailer offered expensive products for Canadian consumers who are highly value conscious and very fond of cross border shopping. Now, Cornell needs to make a clear decision on whether the expansion should continue or the company should focus on developing its supply chain instead. Either way, the Canadian business has to improve as it will serve as the basis for Target’s future international forays.

Need to Ramp Up Online Business & Small Store Expansion

Although Target has deployed several strategies for growth of its e-commerce channel over the past few years, it hasn’t turned into a big business for the company. Despite its vigorous efforts, e-commerce still accounts for just 2% of the retailer’s sales. Moreover, instead of improving, Target’s online growth appears to be stalling due to increased showrooming from Amazon‘s (NASDAQ:AMZN) customers. According to Kantar Retail, only 32% U.S. shoppers visited Target stores and websites in March 2014, while 38% shoppers visited the retailer in the same month last year. Cornell needs to ensure that the retailer’s e-commerce strategies are focused on the most important areas such as shopping experience, product variety, social media involvement, omni-channel platform, m-commerce, etc. However, Cornell doesn’t have much experience in e-commerce, which can limit the scope of his strategies for the online business.

Target’s smaller format store expansion has been extremely slow despite the huge available market. The retailer started its small store expansion in 2012 and had just eight CityTarget stores at the end of 2013. In comparison, Wal-Mart (NYSE:WMT) has opened hundreds of small stores in the last couple of years. Although Target has developed another small format known as Target Express encouraged by Wal-Mart Express’s success, there still aren’t any significant expansion plans. Small store space is only going to get more competitive in the future with the merger of Dollar Tree and Family Dollar, and Wal-Mart’s aggressive expansion. If Target wants to have a substantial small store presence in the country, now is the time.

Cornell Doesn’t have Much Experience in Fashion

Target was once known for its value-for-money stylish and affordable merchandise, but it seems to have lost its essence due an aggressive push towards fresh foods. While this move made sense considering the success of Wal-Mart’s grocery business, shifting focus from its core value proposition is proving costly for the retailer. Although Target’s grocery business has grown slowly, its apparel and home furnishing businesses have fallen rapidly. If the retailer wants to revive its U.S. sales, it has to get better in these areas.

However, Cornell has more experience in groceries, but limited expertise in fashion and housewares. He has spent most of his career in Safeway, Wal-Mart and PepsiCo, which has made him a grocery veteran. ^[4] It will be interesting to see if he actually plans to shift Target’s focus back to its know-for fashion categories, or perseveres with the grocery business.

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1. Statement from Target’s Board of Directors, Target, May 5 2014 [↩]
2. Target Names Brian Cornell as New Chairman of the Board and CEO to Lead Company’s Transformation, Target, July 31 2014 [↩]
3. Target profits dragged down by Canadian expansion, wary shoppers, CBC News, Aug 21 2013 [↩]
4. Target’s New CEO Knows Food More Than Fashions, The Wall Street Journal, Jul 31 2014 [↩]