Target’s Powerful Acceleration Stage

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\"\"Back in August of 2016 when CEO Brian Cornell was beginning to frame his strategy for Target’s turnaround and accelerated growth, I wrote that he was “putting his money where his mouth was”. Indeed, to execute his bold plan he was committing a $7 billion-plus capital investment to implement the strategy. The “defining stage,” according to Cornell, was 2017, to be followed by the “acceleration stage” in 2018.

Exiting 2017, it was clear that Target’s capital investment in the plan was succeeding. Revenue climbed 10 percent to $22.8 billion in the fourth quarter of 2017, from $20.7 billion in previous year’s period, beating analysts’ consensus of $22.5 billion. It was the fourth consecutive year of more than 25 percent growth, with comps growing 3.6 percent in the fourth quarter, driven by in-store traffic growth of 3.2 percent. Comparable online sales rose 29 percent, on top of 34 percent last year, contributing 1.8 percentage points of comparable growth. Furthermore, about 70 percent of online orders were picked up in store. And they gained market share in core categories.

On the other hand (the bottom line), Target earned $1.37 a share, one penny below analysts’ estimates, compared to $1.45 in 2016’s fourth quarter. The company said higher wages dented profit margins. Full-year adjusted EPS was $4.71, compared with $5.01 in 2016.

While Cornell was presenting their growth and turnaround results in real time at Target’s annual financial community meeting, with evidence that their strategy succeeded during the 2017 “defining stage,” their shares literally fell 4.5 percent while he was speaking.

Pause right here for a very important moment.

Cornell’s plan is a GROWTH plan. Get it? Growth in capital letters. That’s what he is committed to. And to gain growth in an over-supplied industry that is being forced to radically transform its models, both structurally and strategically due to the dynamics of a new tech-armed young consumer culture, it is an absolute necessity for Target and all of the other traditional legacy retailers to invest billions of dollars in technology, integrating digital and physical models, and to transform their old-world stores into experiential destinations.

Amazon has received a pass from Wall Street from the get-go with exactly the same strategy: growth over the bottom line. In fact, they are rewarded beyond belief for growth at the expense of profit. Target and its peers do not even get a pass. Instead, they get hammered.

Granted, Target’s growth rate is dwarfed by Amazon. But Target is profitable. My key point is that perhaps Wall Street should redefine and rebalance their performance measures. After all, if the primary objective is growth, shouldn’t growth performance metrics take into account the chaos we are embroiled in and the capital investment required just to stay in business? ROIC should be given more weight. On this point, Target expects their return on invested capital to be around 14 percent.

The 2018 Acceleration Stage

Cornell’s macro objective is to make Target “The Easiest Place to Shop.” This is at the core of all of the initiatives supporting the acceleration stage. And they’ve committed to capital expenditures of $3.5 billion, up from roughly $2.5 billion in 2017, to accomplish those initiatives.

The easiest place to shop objective is all-inclusive. It’s about shopping anywhere –physically or online. It’s about service on both platforms and an elevated, personalized human engagement with uber-trained, higher-paid, tech-and-data-armed associates. The human experience is the huge competitive advantage Target and other legacy retailers have over Amazon and other pure-play digital brands. Target is focusing on professional training, increasing wages to $15 per hour by 2020, and equipping its sales associates with the necessary information and tech devices to personalize each customer’s experience.

The easiest place to shop is also about speed of delivery or pick-up-and-go. Cornell said, “Target is a company that’s built on speed, but focused on service. We’re going to get Target to be the first retailer with same-day delivery.”

They acquired Grand Junction, which finds available local delivery services for same-day delivery, or even within hours. Another acquisition, Shipt, will do your in-store shopping for you and deliver groceries, home goods, electronics and essentials to your front door, the same day. Currently in 440 stores, it will be rolled out to all of Target’s 1828 units. And a service called “Drive-up” allows customers to order on an app, and when they arrive at the “Drive-up” location, an associate will bring their purchases out to their car. This service will roll out from 50 current stores to nearly 1000 stores by year-end.

Target is also expanding its Target Restock service to all shoppers, which used to be for REDcard owners only. Shoppers can fill up a virtual box online with any of the thousands of available products, and their market order will be delivered for free the next day.

Target plans on both renovating and opening more than 1000 stores by 2020. These local destinations will be designed for better service and experience — a modern, fun shopping environment localized in architecture, size and product assortments.

One re-imagined store model provides two different entrances. One is for the shopper who is only interested in speed and convenience. That entry area will house groceries and other basic essentials that customers can “grab and go.” The other entrance will be for shoppers who desire to spend more time in exploring the aisles and discovering unexpected products. They will also be opening localized, smaller neighborhood models for urban locations or in college towns.

Plus, they are updating their roster of private brands, committing to launching 12 new brands in 18 months. These new brands including Cat and Jack, Hearth and Hand, Hunter, Universal Thread, Opalhouse and others are being positioned to regain some of the “Tarjay” DNA that Target uniquely owned.

Stage 3?

I admit I was a skeptic when Brian Cornell took the helm at Target. He inherited a mess and was the first outsider to become CEO. He took over during a period of chaotic transformation. He entered into the fray when giant traditional retailers needed to be speedboats rather than intransigent battleships. At the time, I believed the task might have had too many hurdles for Cornell to overcome.

I’m no longer skeptical. I believe Cornell and his team have developed a powerful strategy and implementation plan for a successful future. The consumer is at its core and driving its every move. Cornell and team are simply, albeit with great complexity, integrating all the necessary tools, including technology, to deliver everything that consumers desire.

So, maybe Target’s 2018 performance, based on their $3.5 billion capex for growth, will convince Wall Street to pay more respect to the ROIC metric.



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