TGT – Canada Quick Thoughts

Takeaway: Closing Canada from a position of strength. Good move. But if former mgmt. could be so off on this call, what else could be buried here?

Target just announced that it is exiting Canada. Some conclusions…

  1. The market had been expecting this. It’s part of what drove the stock up from $60 to $75 over three months. Nonetheless, it’s clearly good news for TGT.
  2. We outlined in our Black Book in May 2014 why Target would likely never earn money in Canada – counter to the company’s goal for earning $0.80 per share from Canada by Jan 2017. In this release, TGT said it’s clear that Canada would not be profitable until at least 2021. How a company could miss a profitability forecast by 4+-years is simply astounding.
  3. This decision was an easy one for new management. But if the old guard could have been so incompetent, how can we possibly believe that the decision to exit Canada is the last problem Cornell will uncover? Fixing Steinhafel’s mistakes could get expensive.
  4. The timing of this decision makes sense, as new CEO Brian Cornell has been in his seat for 5 months, and TGT is guiding to a 3% comp for the fourth quarter, which is about 50bps better than consensus. He’s making this move from a position of strength, which makes all the sense in the world to us.
  5. But let’s not forget the reason why TGT entered into Canada in the first place. First it exhausted the ‘Tar-Jay’ brand allure by turning 65% of the stores into P-Fresh (glorified supermarkets), converting 20% of its sales to its Red Card, and shifting the mix disproportionately away from Apparel, Home and Hardlines in favor of Food and Household Essentials (see below). In effect, TGT began to look a lot more like Wal-Mart.  With a strategically flawed Store and Brand transformation putting TGT up against four different competitive sets – 1) WMT, 2) Department Stores, 3) Dollar Stores, and 4) Supermarkets – not to mention Amazon growing stronger by the day, TGT’s answer was to go to Canada to find growth. Now that it found out the hard way that it was wrong, it does not mean that the factors that caused it to go North of the border have abated.  In fact, if we really are at the tail end of a retail margin cycle, which we think will become evident in 2015, then a dominant positioning in its core market is as important as ever.

 

Though we were right on the fundamentals with this one, that clearly did not matter – and most importantly we were definitely wrong on the stock.  Rather than rush to cover today, we’re going to a) wait to hear what the company says on the conference call, and b) see where expectations shake out. The reality is that TGT is trading at 16x-17x 2015 EPS (assuming 2-3% comp). Aside from the fact that this is a peak multiple for TGT. It seems high to us for a levered company that has its weakest competitive positioning in a decade, and is likely to grow earnings at a sub-5% rate for the next three years. This name should hardly run away from us on the upside.

 

TGT – Canada Quick Thoughts - 1 15 TGT chart1   42 2

TGT – Canada Quick Thoughts - 1 15 TGT chart2  43 2

TGT – Canada Quick Thoughts - 1 15 TGT chart3   44 3

TGT – Canada Quick Thoughts - 1 15 TGT chart4   45 4


Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more