An Open Letter To Target Management | $TGT

Takeaway: Winners find a way to win. But TGT points fingers while #failing to reinvest for growth.

Editor's Note: Below is a brief excerpt from an institutional research note written by Hedgeye Retail analyst Alexander Richards. For more information about our institutional research contact sales@hedgeye.com

 

An Open Letter To Target Management | $TGT - TARGET cartoon

 

The obvious place to start the conversation on TGT would be on the numbers, and the company gave us plenty of ammo to poke holes in the print this morning. But we think the far greater concern for the long-term health of this company is the lack of definable plan or any clear insight by the management team as to what actually caused the worst quarterly comp number since the data breach and subsequent guide down for 2H16.

 

We heard a lot of excuses, everything from Apple products losing their cache, to deflation, e-commerce pressure, and soft Rx traffic. Which all may be legitimate in their own right – but we have a NEWSFLASH for Cornell and team...

 

This is something we like to call RETAIL. The environment/consumer isn’t going to throw anyone a bone, especially at the tail end of a seven year economic expansion. In this sport, only losers point fingers. Stocks that make investors money on the long side find a way to win. Target is doing the opposite.

 

All in, we think this is all very characteristic of a management team playing defense instead of offense. Need further evidence? How about 2 consecutive quarters of earnings beats generated by cost cuts and share buy-backs with the stock at or near all-time highs. We’d argue that the team in Minneapolis would be better served missing expectations and taking down numbers by 2x the rate we saw today in order to build a superior platform from which to grow.

 

That may sound harsh, but after running through the numbers and sitting through the 60-minute conference call, we were still left asking what actually happened? In the absence of a clearly articulated answer from the TGT C-Suite. Meanwhile, we think Target is underinvesting in its business at a time when the Retail industry is becoming more competitive.

 

We expect Target to continue to lose market share.


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