Takeaway: Cornell just jammed unhittable guidance down the outgoing CFO’s throat.

The Print/Analyst Day

Quarter much like we expected, inline EPS, with comp slightly ahead and gross margin slightly weaker. SG&A driving the upside to hit the EPS number.
In 2018 with a 5% comp, EBIT declined 3% (slight impact from 53rd week).
Inventories still a problem here up 10% on a 5% comp. Better than last Q, but still high. 
Separately, we’re starting to question why TGT keeps doing this 4Q print Analyst day routine.  Per Biolsi, who was there in person and has attended/viewed hundreds of these… “this was the least informative analyst day I have ever experienced”.
It is starting to feel like a conference call just with a better platform for Brian Cornell to be promotional, and with video backup.


Guidance, It’s All About the Comp

Guidance is somewhat puzzling, as the company is guiding earnings for the year 5% higher than the street and up 9% yy, but that is with a low to mid single digit comp… the range of earnings is large on a low SD comp vs mid SD comp. 
The company is guiding slight (10bps) operating margin leverage.  When pushed on the make-up the (soon departing) CFO said the following:

“Operating income rate first because that's the better place to start. We said that we'll see moderate expansion there this year as we think '18, 2018 was a good waypoint as we think about going forward. So we've got enough insight into headwinds and tailwinds. It'll balance. So then when you move back up, we haven't been as specific between gross margin and SG&A, but we actually don't expect a big change, right? So we already understand where the business is at. We understand Q1 is going to be a little lighter on the margin side because of a little bit of the mix business that Brian talked about in his prepared remarks. So Q1, but then the rest of year, kind of expect the balance between gross margin and SG&A and a little bit of leverage on the op income line.”

Some might take the comment of “don’t expect a big change” to mean about flat gross margin and flat SG&A rate.  We don’t think that is what she is saying.  The change won’t be 100bps+ on either, but we take her comments to mean more that one will be offsetting the other, and similar to the trend that has been observed.  That to us means gross margin down and SG&A leverage.  This is why we say guidance is all about the comp.  Gross margin has to be down 20-50bps in 2019 we don’t see a way around that for TGT given its investments and inventory position.  The SG&A leverage needed will only happen if the company can comp 4-5%.  Given the comparison set-up, our macro view of slowing US GDP and slowing consumer, and the fact that the company just made it clear that Toys and Baby growth was a big help in 2018 (our math was about 100bps of help, but company comments implying potentially more, which is not repeatable), we think 4-5% is not achievable with margin expansion in 2019.


Cathy and Brian Friction

One big takeaway I (McLean) got from listening to the webcast was that the CFO appeared only willing to bless 1Q, and took no ownership for the rest of the year.  Check out the transcript from Q/A:

  • (Question about cadence of earnings and sales throughout the year given 1Q guide and comparisons)
  • Answer: “I'm happy to take it. But -- so as we said, we'll see a little bit of pressure on the op income line in the first quarter. But to Brian's -- the guidance we gave today, low to mid-single top line, and that was Q1 and full year. So you can expect -- and you guys know what our comps for this last year, so we can think about the 2-year stacks going there. But you can expect a pretty consistent -- there's -- we're not giving guidance for second, third and fourth quarter right now. But you can expect a pretty consistent pace there, if you think about low to mid in the first quarter and low to mid for the full year. It's not hard to figure that one out. And then to your point about the EPS side, same thing. If you look at the course of the year, first off, we have to start with sales. And if we expect sales to be not too big a swing in any given quarter, you should expect a similar path on the bottom line. So that's where I would go for now. Obviously, we've put that in our guidance in the first quarter and the full year.

In the beginning, it's almost as if she was saying in 1Q I see this, and Brian is guiding the rest of the year.  We would try to use that excuse (Brian did it, haha) on the Hedgeye Retail team, but none of us are retiring in May.
The commentary here signals we are probably on the right track as to the reason for Smith’s retirement just 3.5 years after joining the company.  Cornell keeps backing her into a corner with growth initiatives when she is supposed to be managing and communicating the financials.  She likely wanted guidance to be more reasonable, and Cornell’s promotional and growthy nature wouldn’t allow it.  She wasn’t going to be pushed around anymore and decided to call it quits.


A Lot of Money and Effort for 10bps

Just to keep things in context.  TGT is spending $10bn over 3 years, including $3.5bn in 2019, to hopefully get to a profit leverage profile of 10bps a year.  That is a lot of money and effort for 10bps.


Ship From Store

Lastly, “ship from store” is not lower cost than shipping from a DC. Shipping from store has to include the cost of shipping from the DC to the store (ie shipped twice), plus any cost of labor fulfilling in the store (not as efficient as doing in a DC).  If the starting point of the analysis is the cost from the point FedEx grabs the box for final delivery, then sure, it might be 40% cheaper to ship something 60mi vs 300mi, but that’s not the full cost of fulfillment.

Curbside delivery is appealing, but costly

Walmart and Target have discovered an appealing shopping experience for customers with curb side delivery. When quick service restaurants have two-thirds of their sales through the drive through the appeal is easy enough to understand. The primary difference for the mass discount retailer vs. the restaurant is that there are no additional labor costs for drive through restaurant orders. Store personnel costing more than $15/hr to put the items in the basket that the customers previously did for themselves is not an insignificant margin impact. It does give the big box discounters a competitive edge in food vs. the grocery stores that are only in small tests since they probably can’t afford it. TGT also helped put the number in perspective. “Close to 2mm parking lot deliveries” in 2018 equates to less than three per store per day (though not available in all stores, yet).

TGT | Be Careful Who You Believe - 3 5 2019 TGT earn table