TGT - Target

[solobz]

I've traded the name around this year but no current position.. Valuation attractive at face value with the divvy and buyback. Tempting name as a cannibal.

 

Don't own it now though. Kind of feels like dead money at $60. Seems cheap at 13x earnings, but OTOH I don't see a no-growth retailer with small/poor ecommerce biz getting re-rated to a 16-18x multiple anytime soon in this environment. Say they execute and get 15x on 4.50 consensus EPS over next year.. you're getting a 12.5% + 4% yield..16% isn't shabby. Also think downside pretty low ($50?).  But equally likely imo is $56 on 13x $4.30 EPS forever.

 

Business wise, worried about grocery and margins and competition. management seems ok, but not really doing anything to counter walmart/jet or amazon. capex going to store refreshes and ecommerce experience is pretty meh.  I think the HGTV Magnolia line should do really well. More private label clothing probably a +'ve. Does this offset other pressures? Idk.

[Junto]

Great past week. Always nice to see. Was a great value play. Now need to revisit current valuation to prospects.

[bizaro86]

Went long here at $55 or so around the same time as many in the thread, but am getting nervous after the run up. I had initially told myself this was a keep forever quality business, and I bought Costco at the same time, about which I still feel that way.

 

However, a recent trip to the US where we rented a condo was interesting. We bought our groceries for the week in advance on the Walmart website, and friendly employees loaded them into our rental car for us.

 

The Walmart was clean and inviting when I went there later for more milk. I also stopped at a Target on my way to a hike for bottles water, and found it dirty, disorganized, and lacking in price stickers,  which always annoys me.

 

The Walmart experience was leaps and bounds better, and I would actively avoid Target the next time (as a shopper).

 

That I'd all anecdotal, but my question to the board is do you feel Target has a moat that will earn a reasonable return of capital over time?

[rkbabang]

Great past week. Always nice to see. Was a great value play. Now need to revisit current valuation to prospects.

 

I wonder if this is just going up because of:

 

http://fortune.com/2018/01/05/amazon-target-buy-walmart-whole-foods/

http://fortune.com/2018/01/02/amazon-will-buy-target-gene-munster/

https://www.geekwire.com/2018/taking-world-amazon-will-buy-target-2018-says-analyst-gene-munster/

https://www.inc.com/christina-desmarais/why-amazon-buying-target-is-best-prediction-of-2018.html

 

[bizaro86]

That's what worries me. If I'm lucky instead of good I'll take it, but would prefer not to press that...

 

(I might be, since one of my best positions in 2017 was FRMO, which went up for a reason anathema to why I bought it...)

[villainx]

That I'd all anecdotal, but my question to the board is do you feel Target has a moat that will earn a reasonable return of capital over time?

 

I hardly shop at Walmart, and I prefer Target more.  I find the Target stuff a little better quality, - and some of the store brand stuff has good reputation for quality. As well as, familiarity with the layout of Target stores motivates my shopping there too. 

 

At the same time, there aren't Walmarts near me.  Though I do stop by Walmarts when I'm on vacation just to check it out and compare. 

[Jurgis]

The Walmart was clean and inviting when I went there later for more milk. I also stopped at a Target on my way to a hike for bottles water, and found it dirty, disorganized, and lacking in price stickers,  which always annoys me.

 

We have two Targets near us: a large one and a small one that opened in former Shaws supermarket.

Both are new(ish) stores with pretty modern layout. Definitely not dirty/disorganized.

OTOH, we don't shop in either of them, so...

 

We don't quite understand the logic of opening Target in former Shaws. Target has both clothes and groceries in what was not a huge grocery store previously. Which means that both clothes and food selection is very limited. My wife went there when they opened and gave $5($10?) free coupon, but we never went there afterwards. We would have been much happier if a real grocery shop opened there...

 

FWIW.

[DooDiligence]

Target carries a full line of Apple products (in store & online) including the iPhone X (WalMart only offers the 8.)

 

Why haven't they capitalized on a slightly higher priced, more attractively designed, better quality inventory, sold in a nicer atmosphere?

[Junto]

Really great stock turnaround. One of the leaders in the portfolio. What's everyone's view on the retail outlook the next 3 to 5 years?

[Foreign Tuffett]

Insightful post from The Peridot Capitalist blog. I think it's reasonable to believe that, over time, e commerce is going to depress gross margins for physical retail. In part this is due to how trivially easy the internet makes it to price compare, something that used to be burdensome and time consuming.

 

https://www.peridotcapitalist.com/2019/01/the-chase-for-e-commerce-market-share-is-killing-retailer-margins/

[bci23]

Insightful post from The Peridot Capitalist blog. I think it's reasonable to believe that, over time, e commerce is going to depress gross margins for physical retail. In part this is due to how trivially easy the internet makes it to price compare, something that used to be burdensome and time consuming.

 

https://www.peridotcapitalist.com/2019/01/the-chase-for-e-commerce-market-share-is-killing-retailer-margins/

 

The Ecommerce shift is not some new concept though. I think the biggest thing is retailers need to adapt to changing customer buying behavior and become good at instore/online/mobile/tablet/delivery experience in order to survive. This shift has already claimed lots of retail victims but some have navigated through just fine. This narrative that ecommerce/amazon is killing retail was the same narrative in 2012 when Best Buy was suffering. Fast forward 7 years and BBY has navigated the changing landscape extremely well and their stock has performed as well. Both their sales and EBITDA margins have grown during that timeframe, their gross margins probably aren't that much different.

[Foreign Tuffett]

Insightful post from The Peridot Capitalist blog. I think it's reasonable to believe that, over time, e commerce is going to depress gross margins for physical retail. In part this is due to how trivially easy the internet makes it to price compare, something that used to be burdensome and time consuming.

 

https://www.peridotcapitalist.com/2019/01/the-chase-for-e-commerce-market-share-is-killing-retailer-margins/

 

The Ecommerce shift is not some new concept though. I think the biggest thing is retailers need to adapt to changing customer buying behavior and become good at instore/online/mobile/tablet/delivery experience in order to survive. This shift has already claimed lots of retail victims but some have navigated through just fine. This narrative that ecommerce/amazon is killing retail was the same narrative in 2012 when Best Buy was suffering. Fast forward 7 years and BBY has navigated the changing landscape extremely well and their stock has performed as well. Both their sales and EBITDA margins have grown during that timeframe, their gross margins probably aren't that much different.

 

Of course not, but e commerce has consistently gained market share vs physical retail, something that is likely to continue.

 

For a multitude of reasons, I think the Best Buy is an outlier (Geek Squad, product lines that lend themselves well to experiential retail and extensive brand tie ups, average consumer needs help to understand a segment in which new gadgets are constantly being introduced, etc).

 

 

[DTEJD1997]

Hey all:

 

I was in a suburb of Cleveland OH, and had 30 minutes with absolutely nothing to do...

 

So I went into a Target store and figured I might as get some stuff that I need and be at least a little productive.

 

I was quite surprised by what I saw.

 

The menswear section looked like a bomb went off.  Stuff lying on the floor.  Merchandise obviously looked at (tried on?) and then just put back pell mell.  There were TREMENDOUS amounts of stuff missing (certain jean sizes were just not there).  The VAST majority of clothing was house brand OR the very lowest quality brand.

 

It seems like the food section is clearly being neglected/phased out?  Prices on some stuff were simply "silly" high.

 

The hardware section was laughable.  Same thing with office supplies.

 

Seems like the VAST majority of product was house brand stuff...not really that good a selection of anything.

 

Seems to me this is NOTHING like the Target of 10-20 years ago.

 

OR did go to an odd location?

 

If every Target is like this, I think they have HUGE problems.

 

 

[longtermdave]

It's hard to say because nobody here is surveying every location, but that location doesn't seem representative. I have two near me north of Houston, and they are both very nice and recently renovated.

 

Hey all:

 

I was in a suburb of Cleveland OH, and had 30 minutes with absolutely nothing to do...

 

So I went into a Target store and figured I might as get some stuff that I need and be at least a little productive.

 

I was quite surprised by what I saw.

 

The menswear section looked like a bomb went off.  Stuff lying on the floor.  Merchandise obviously looked at (tried on?) and then just put back pell mell.  There were TREMENDOUS amounts of stuff missing (certain jean sizes were just not there).  The VAST majority of clothing was house brand OR the very lowest quality brand.

 

It seems like the food section is clearly being neglected/phased out?  Prices on some stuff were simply "silly" high.

 

The hardware section was laughable.  Same thing with office supplies.

 

Seems like the VAST majority of product was house brand stuff...not really that good a selection of anything.

 

Seems to me this is NOTHING like the Target of 10-20 years ago.

 

OR did go to an odd location?

 

If every Target is like this, I think they have HUGE problems.

[Gregmal]

Yea I don't go to Target often, however the one I do visit anchors a Washington Prime owned strip, along with a Dicks. It is very well maintained, was recently renovated. If anything, it looks more like an Apple store than a Sears or JCP. I've always thought Target would make a nice acquisition for Amazon.

[SharperDingaan]

Welcome to the 'new' retail business model.

 

Customers buy product + experience + story.

Everytime you buy a starbucks coffee you're paying for 'experience' (barista preparation). Every time you receive a 'drone' delivery, you're paying for 'story'. The product itself is just a commodity, and the more 'branded' it is the more of a commodity it is. To price shop efficiently/effectively, you have to use a robot (app), to compare prices on a standardized product (brand).

 

Brick & Mortar is product + experience/entertainment. Any women can tell you this.

Hard to scale, relys on habit, and usually works better with smaller (mom/pop) versus bigger (chain) stores. You shop at the same stores every week because it's what you do on shopping day (habit). And the stores on your 'circuit' are only those where you liked the 'experience'. Boutique shoes for experience/entertainment, Home Depot to save time (experience); if you just wanted product X, you either did a price check & went where it was cheapest (entertainment), or just ordered on-line with next day delivery.

 

The Target experience is telling you that there are too many stores (can't keep the look/feel the same), and that the stores are too big (cant maintain look/feel within the store). To lower prices Target relied on volume discounts, quality downgrades, and enough outlets to make 'boredom' sell the product. I buy a soda because I'm bored, & it's always 'there'.

 

So todays 10x forward earnings is really more like 14x earnings, simply because over time - future earnings (Yrs 2-10) are highly likely to be lower than what is being projected for current one-year forward earnings. Retail is expensive.

 

SD

 

 

[Spekulatius]

A lot of Target stores feel a bit like Walmart stores nowadays in terms of layout and product feel. I think clothing in particular has gone a bit downhill. Walmart stores have improved a little.

 

I think TGT made a huge mistake with their half baked grocery push a while ago. They are just not competitive in this segment on price and much less on variety.

 

That said, their recent sales results were quite strong and they are building momentum in online sales.

[Junto]

A lot of Target stores feel a bit like Walmart stores nowadays in terms of layout and product feel. I think clothing in particular has gone a bit downhill. Walmart stores have improved a little.

 

I think TGT made a huge mistake with their half baked grocery push a while ago. They are just not competitive in this segment on price and much less on variety.

 

That said, their recent sales results were quite strong and they are building momentum in online sales.

 

I completely disagree. Try traveling to Minnesota and compare the two. I don't know other areas as well but this is completely wrong around here.

[rkbabang]

A lot of Target stores feel a bit like Walmart stores nowadays in terms of layout and product feel. I think clothing in particular has gone a bit downhill. Walmart stores have improved a little.

 

I think TGT made a huge mistake with their half baked grocery push a while ago. They are just not competitive in this segment on price and much less on variety.

 

That said, their recent sales results were quite strong and they are building momentum in online sales.

 

I completely disagree. Try traveling to Minnesota and compare the two. I don't know other areas as well but this is completely wrong around here.

 

I don't live very far from Spekulatius (about 20 miles or so) and that isn't true in my town either.  My local Target has the look and feel of an upscale store, it is very nice inside with normal looking well groomed people shopping and working there.  The closest Walmart to me feels like you just stepped into a 3rd world country.  The store itself is, I'll just say: not even close to as nice looking as Target, the customers are gross, the people working there are gross.  The last time I went in there the cashier stunk so bad I had to stand way back from the register to not puke.  The time before that the cashier was wearing pajama pants and slippers and had missing teeth.  I don't even know where they even find these people.

 

[mbreject]

The Target near my house is nice and clean, but the other Target that's like 5 minutes is downright scary (same city.) I wasn't comfortable at all and got out as quickly as I could. It sucks, because it wasn't always like that. I think they just gave up on it and are waiting for the lease to end. They even had theft detectors on cheap stuff.

[Spekulatius]

The Target near my house is nice and clean, but the other Target that's like 5 minutes is downright scary (same city.) I wasn't comfortable at all and got out as quickly as I could. It sucks, because it wasn't always like that. I think they just gave up on it and are waiting for the lease to end. They even had theft detectors on cheap stuff.

 

My experience as well- some stores are nice, others seem neglected. I haven’t seen customers in Target stores in pajamas yet ( common in some Walmart stores) so there is that.

[amzndrone]

I have two questions on TGT as I'm no retail expert 1) what are people's views on fullfilling from stores versus distribution centers in terms of the economics and feasibility of it and 2) there is a roughly $1B delta between capex and D&A so it appears cheap on reported earnings but less so on cash flow...which is a better reflection (capex or D&A) of the actual LT trend in terms of investment required?  Thanks

[GregS]

I have two questions on TGT as I'm no retail expert 1) what are people's views on fullfilling from stores versus distribution centers in terms of the economics and feasibility of it and 2) there is a roughly $1B delta between capex and D&A so it appears cheap on reported earnings but less so on cash flow...which is a better reflection (capex or D&A) of the actual LT trend in terms of investment required?  Thanks

 

Re #1, I think online fulfillment is more expensive no matter what.  The hard thing about in store is you can't just start pulling stuff off shelves, you need to revamp the whole supply chain so you are getting the right inventory into the store, you need to modify stores to pack and ship, in store pickup, curbside, whatever you're doing.  It requires investment and change in operations.  At our local Wal-Mart in store pickup is in some dank closet in the back, just a terrible experience.  Our local TGT hasn't been remodeled and so the experience is marginally better.  This will only work if they redesign/remodel stores and distribution, but TGT is doing just that.  You also need a broad enough store base to make ship from store and pickup a good experience vs AMZN's fulfillment.

 

Bottom line: downward margin trends are likely to continue for TGT and others but the ones that invest in this will retain/gain share.  Really, the only companies that can do this at large enough scale to compete online with AMZN are WMT and TGT because of their resources to invest and broad store base (and by compete I mean still distant 2nd/3rd but at least in the game).  Smaller chains are going to see higher costs for a worse guest experience than these three.

 

For 2, and this is related to 1, Target is doing major investment right now with store remodels in particular.  I don't have the numbers in front of me but management has discussed over the last year or two.  This is something all retailers need to do from time to time (or they die like Sears), but it's lumpy.  IMO, D&A is a better proxy for long term capex needs for a retailer not pushing store growth, but  for TGT depreciation is probably going to rise the next couple of years.