Target (TGT:NYSE) CEO Brian Cornell’s first-ever analyst
day did not disappoint. It was also not short of
surprises. While the company’s 2015 and long-term
comparable store sales guidance came in lower than
expected, its aggressive share repurchase strategy and
earnings algorithm surprised sharply to the upside. We
come away from the event incrementally positive and
believe Cornell has purposefully set the bar low in order
to leave ample room for upside as the year progresses.
Under the stewardship of Cornell, Target has emerged as a
more agile, more efficient, and more focused company.
This point cannot be overstated. As seen in his decision
to quickly exit Canada, we believe Cornell has the rare
executive tendency to act swiftly and purposefully. We
expect this to be a hallmark of his tenure, and believe
the strategy he unveiled today is consistent with such an
attitude. By eliminating complexity and facilitating
efficiency, he is committed to unleashing and
accelerating innovation throughout the company, with the
ultimate goal of delivering what guests want.
To that end, following Target’s comprehensive strategic
review, management believes it now has a very clear
understanding of its shopper, which has increasingly
become families (a growing percentage of which are
Hispanic) that are digitally connected and value
conscious. In fact, Cornell revealed that guests who shop
both in-store and through the digital channel drive 3x
more traffic, 3x more business, and 2.8x in-store spend
as guests who shop exclusively in-store. This means
digital engagement does not take away from the store
experience, and instead creates more trips and a higher
The strategic review also helped management zero in on
key merchandise categories. As discussed on the fourth-
quarter earnings call, management intends to dedicate
outsized time and energy to enhancing Target's signature
categories (Style, Baby, Kids and Wellness), which
account for $20 billion in sales and have among the most
attractive gross margins. The company’s grocery business,
while not a signature category, will also play a key role
in its overall assortment and ties very closely to its
focus on “Wellness.” Guests, according to management,
want more choices -- more natural, organic and gluten-
free items with simpler, cleaner ingredients and labels.
In order to serve customers in urban, densely populated
cities, Target is testing and rolling out new CityTarget
and Target Express formats, which boast twice the
productivity and high-30% margins.
Now let’s take a peek at Target’s financials. Over the
long-term, it expects to grow the top-line in three ways:
1% store channel comparable sales growth; 40% digital
channel sales growth CAGR (2015-2019); and modest growth
from new stores, most importantly Target Express and
CityTarget. We believe management is sandbagging the 1%
long-term comp target, which plays perfectly into
Cornell’s clear bias towards setting the bar low and
surprising to the upside. We would note that the company
expects digital to contribute half of the total comp, a
long way from the de minimis contribution we saw as early
as several quarters ago. For 2015, management is guiding
to 2-3% total sales growth, with 1.5% to 2.5% comparable
sales growth; for 2016 and beyond, it is guiding to 3%
sales, driven by the aforementioned 1% comp.
On the cost side, the company is targeting $2 billion in
expected savings over the next two years, which will be
immediately reinvested into growth and profitability. It
expects EBITDA margins to improve 20-30 basis points year
over year in 2015 and is ultimately targeting 9.5% to 10%
EBITDA margins over the next five years, which falls
roughly in line with consensus. This year, the company
expects to invest $2 billion to $2.2 billion in capex,
with roughly half coming in the form of IT and the supply
chain (in line with its goal of investing heavily in the
digital channel). Longer term, it expects to spend $2
billion to $2.5 billion in capex, which is slightly above
In regards to capital allocation, the company is
targeting a 40% dividend payout ratio by 2019, which is
somewhat lower than the current ratio. It plans to
increase the dividend 5-10% annually, well below the 20%
growth rate achieved over the past five years. While this
may seem disappointing, Target’s buyback guidance blew
even the most bullish estimates out of the ballpark.
Management expects to repurchase $2 billion of shares
this year (which compares to our $700 million estimate
and $600 million consensus) and $3 billion each year
thereafter (which compares to $1.5 billion consensus and
represents 6% of the company’s market cap). This adds
another, unexpected, dimension to the Target story and
makes us confident that earnings will be supported for
the foreseeable future. For 2015, these variables lead to
adjusted earnings per share guidance of $4.45 to $4.65,
which at the midpoint comes in 5 cents higher than
Overall, we are excited by Target’s analyst day, and
believe the company has positioned itself well for the
long term. In our view, Cornell “gets it,” and we are
impressed by the way in which he has organized,
prioritized and communicated his strategy. We believe he
is low-balling his comparable store sales guidance (or as
we like to say, “setting a one foot hurdle”), not unlike
the way in which he low-balled fourth-quarter 2014
guidance, which provides room for material upside as the
quarters progress. We expect long-term comparable sales
growth to come in twice that of management’s forecast,
and believe the added boost from its unparalleled buyback
plan can bring real earnings power materially higher than
its own forecast. We reiterate our $90 target on shares.
Jim Cramer, Portfolio Manager & Jack Mohr, Director of
Research - Action Alerts PLUS
DISCLOSURE: At the time of publication, Action Alerts
was long TGT.
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We are not too concerned by the miss, as weather was likely a factor and pricing trends and mix are encouraging.
One pivotal question is how quickly Target can resume buybacks.
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