Ackman Aims at Target's Bulls Eye: Right on Time

I'm probably going to say a few things here which would otherwise be considered politically unwise to say here. I'd feel better about that if I got the whole disclosure thing out of the way first.

I own approximately 300 shares of Target (TGT) stock, held long, vested in my Target 401k account under a Target stock fund. I worked for Target for over six years. The separation was not amicable for either of us. I'll spare the details of what happened. They are not so important to what I am writing about here anyway.

I learned much about the company, both how it projected itself to the outside world and how its internal functioning left me wondering on more than one occasion. In the six plus years I worked for Target, I saw the company repeatedly make the same economic mistakes year after year. Granted, one of those years was particularly rough economically, and while I have not stepped foot in a Target store since I left the company, I imagine that traffic is probably fairly light about now, and those who remain with the company as non-management hourly employees are probably well aware of how much Target does not really care for them right now. Yeah, "Target the family" is great, but in tough economic times, family doesn't matter as much as survival and executive compensation at the top.

One year, after a particularly successful holiday season, Target made great strides in its internal publication to thank everybody for their hard work while simultaneously cutting off all credibility by reducing all non-management and non-supervisory hourly employees to less than 20 hours a week. I really shouldn't have been surprised. After all, it was an annual ritual. It is therefore difficult for me to believe that Target cares about its employees, but more importantly for the purpose of this article, it is difficult for me to believe that Target cares about its shareholders.

In retail especially, retention rate of employees is a very important factor. It costs a lot of money to hire and fire employees. A lot of time is spent in training, and the quality of employee is rarely ever a factor in who stays around after the holiday season is over. I saw good people let go and poor performers kept around on a regular basis. I saw my own pay rate "capped" despite my ability to run circles around most of the people I worked with in regard to speed, friendliness, and an overwhelming and genuine appreciation for the guests who came in the stores I worked in.

But okay, let's forget about employees for a second. After all, they are a mere expense on the annual and quarterly reports anyway. Who really cares about them? So on to more mundane topics, like merchandising.

As I said, I worked for Target for over six years, and repeatedly saw them make the same merchandising mistakes every year. During my career at Target, I worked at three different stores in Massachusetts. The weather can be rather fickle up here in the New England area, especially in the months of February through April. I never understood why Target insisted on clearancing out winter merchandise toward the end of January through February when every year, there would be a snow storm in March when we would never have the supply to meet the demand of the guests who came in the store, and our profit margins were reduced on all of the clearanced merchandise when it would have been easy to sell it at full price in the middle of a winter snow storm.

As both an investor and a former employee, it has been with great interest that I've watched Pershing Square's Bill Ackman over the past several months try to put Target on a different corporate path. As a former employee of Target, I understood the need and desire of Target to market its Target Red Card program as an integral part of its business strategy. It drove sales to the stores on a regular basis, leveraged Target's competitive skills as an ILC even while Wal-Mart (WMT) somehow failed to make a compelling case to compete with Target in this area (one that I personally think it should have won), and gave Target something chic to market to it's current and potential clientele.

As the recent economic troubles have shown, and as Ackman had been trying to say for months prior to Target finally agreeing to sell a portion of its credit card portfolio a few months ago, credit markets can be just as risky, if not more so, than they are profitable.

On this particular issue, I consider myself quite a flip-flopper, but now, I'm firmly committed. Because of my issues with failure in proper merchandising mentioned above, I must give my hand to Ackman here. Back then, you never would have heard me say this, but Ackman was right all along. Target set itself up for significant credit risk, and has suffered some substantial losses as a result of the economic downturn. Now, Target wants me to believe, as a shareholder, that it has the proper expertise available to navigate this current economic situation, and that I should also believe that it has selected a qualified collection of people to be up for election on its board of directors.

To be fair, I do not agree with all of Ackman's claims pertaining to the directors selected by Target. In particular, Target does have a mini-restaurant section in most of it's stores which they refer to as "Food Avenue", and so a director familiar with the food service industry would be a worthwhile contribution for Target to have on its board of directors.

However, I find Target's claims even less compelling in trying to defend itself against Ackman. As I mentioned above, I have witnessed first hand Target's managerial missteps, and I'm all in favor of bringing in some fresh ideas. Right now, I think Target desperately needs those, because as a brand, there is so much they could do better, and so much they could have done better in the past.

When management continues to reward itself for doing a less than stellar job with salaries and stock options which rob both employees, who contribute hard work, and stock holders who provide some liquidity to the company, i'ts time for a change, and I sincerely hope that Ackman is the change that Target needs right now. If he isn't, it is time for Target to seek outside of itself for ideas which will further it's corporate mission statements, and maybe for a change, actually follow them, both internally to make "the best company ever" and externally to the world, because, as Target says in its internal corporate literature, "without the guest, we are nothing."

Right now, with the economy as it is, guests are hurting, good hourly employees are probably being rewarded with severe hourly cutbacks, and stockholders are hurting right behind them.

It is time for a serious change. Vote for Ackman's nominated slate of directors.

Disclosure: Author holds a long position in TGT. No positions in Pershing Square Capital Management.

Comments

[Larrysyr:]

Thanks for this article. The insider's view helps me understand my own change in attitude toward Target.

When Target opened up in my area a few years ago, I thought it would present the antithesis to Wal-Mart's clogged and dirty stores and surly customer service. I even bought some stock.

After a while, though, I realized Target does not carry some basic items I look for in discount department stores (like dress shirts), and the employees don't seem to care all that much about the customers. The employees also carry around screechy walkie-talkies which are turned up to a volume that makes me jump out of my skin every minute or so.

Meanwhile, Wal-Mart made great strides in updating and cleaning up its stores, and always seems to carry something related to what I'm looking for. When thinking about going to one or the other store, there no longer seems to be any reason to stop at Target.

So I accepted my losses and sold my Target stock.

May 15 10:36 AM

[user426187:]

Instead of whining, let's look at Ackman's two big issues:

Real Estate leverage - Just imagine what the value of the Ackman-proposed real estate spin-off company would look like if accomplished a year ago when commercial real estate was so much farther from the cliff upon which it so precipitously perched now. It would be in the dumps.

And Target Corporation, left with billions of extended lease payments on over-valued sale-leaseback real estate would have a much lower intrinsic value in the current marketplace.

His strategy also ignores the migration of demographics rendering store locations obsolete.

I've been down that road with my retail chain store company and it's a bummer. Ackman's proposal is blatantly selfish (read: good only for the short/mid-term).

Credit cards - a real boon to marketing intelligence as well as consumer bounce back. Target's higher default rate is due substantially to its more rigorous and aggressive write-off discipline. They are not doing badly in their management of this facet of the business.

May 16 10:44 AM

[Glenn Alperin:]

Larry, the idea of the walkie-talkies is to make the shopping experience for guests more pleasant. I'm sorry they were turned up louder than perhaps they should have been. Outside, when pushing carts, I had to turn mine up obnoxiously loud to hear anything, but inside, I had it turned up to about half that volume. I found them very useful as a team member, and I know that most guests appreciated the fact that they could get quick answers to questions if the person they were asking was unable to provide the answer right away.

But you are right about one thing: Most of the employees really don't care. That was my chief frustration with working there. One can ask why they don't care, and I think the answer is because Target ultimately doesn't care about them either. Corporate caring goes both ways. If Target would care about its employees, perhaps its employees would care more about it. Coincidentally, Walmart is not much better in this regard. Both companies make huge profits by paying their employees wages which they are unable to achieve long-term economic stability.

As for merchandise, its a bit of a corporate myth that Target and Walmart are competitors. Walmart seeks out a clientele of a slightly lower socio-economic scale. "Always low prices" is great marketing for people with fewer dollars in their pocket. I've rarely set foot in a Walmart store, but when I have, the merchandise has been fairly comparable even if the presentation of that merchandise was a bit different. Different geographic locations will have different merchandise (how many pair of snow skis do you think they sell in Florida, for example?) and different store locations will require being in tune with the economics and social issues of the area the store is built in.

User, I agree with you too, but that is precisely why I think NOW is the time for Ackman to take charge, and why a year ago, I was NOT convinced of Ackman's ideas. Real estate has tanked to historic lows. Now would be the time to invest in it. As far as demographic migration, do you think corporations don't look at that when deciding where to build stores? Do you think Ackman, as a profit-driven investor, isn't aware of these details? I think Ackman is very much aware of the intrinsic value of Target, and he wants to make that intrinsic value greater. I think now would be the perfect time to give him that chance.

One thing I like about Ackman, while sometimes being frustrated with it, is his proposing of "solutions" to companies which appear to have put their head in the sand. He doesn't always win his fights, but the fact that he voices his concerns is usually enough to get corporations to take a serious look at his motivations, which on the whole they are usually in agreement with even if they differ on strategy for achieving it. Given that he himself is an investor, its not hard to see where those motivations lie.

May 20 03:52 AM

[Cult of Red:]

Great article!

From an inside view, a bad culture that fails to learn from history is in need of a serious shake up. At HQ the same mistakes are made over and over and over. Middle managers are rewarded and those lower on the food chain are churned/scapegoated out of the company.

I hope Ackman is succsessful in turning around this toxic culture of yes-men.

May 23 12:57 AM