Target Store Operations: Impact On Earnings Growth Potential, Part 2 Of 3

| About: Target Corporation (TGT)

A couple of weeks back I wrote the first of a three part series that will help to outline why some retailers suffer more than others when there is a downturn in the economy here in the United States. I have specifically chosen to highlight Target Corp. (NYSE:TGT) in my series of informative pieces due to the on-going competition and the direct correlation the company has with Wal-Mart (NYSE:WMT). Lastly, and most importantly as it pertains to the average investor, I aim to show the operational differences and scale of operations for TGT as a penetrating or impacting piece of information when gauging an investment in Target Corporation. It should be clearly stated at this time, that neither Capital Ladder Advisory Group nor myself have a position in either Wal-Mart or Target presently. I will also disclose at this time, that based on operational scalability, I would favor an investment in Wal-Mart over Target solely on this metric.

Store Team Overview And Scale Impact

So let's dive right into Target Corp. and take a closer, detailed look at how a Target store is operated and managed by its team of fast, fun and friendly employees, or team members as the company likes to promote themselves. The typical Target store will consist of at least 7 executive level managers including the Store Team Leader or General Manager. The leadership team is assigned strategic departments of expertise: Soft Lines, Hard Lines, Asset Protection, Guest Services/Front End, Logistics, Human Resources and Store Team Leader. A high volume store and SuperTarget store will have at least one additional Logistics/Replenishment Executive Team Leader, an Executive Operations Team Leader and an Executive Food Team Leader.

Working our way down the food chain, we come to our department team leaders for each and every respective department in the store from Infant/Baby dept. to Home Goods and over to Starbucks. Additionally, there are operational team leaders for price change, plan-o-gram and In-Stocks teams. There are upwards of 19 department team leaders in an average Target store. Lastly, but certainly not least, are the store team members from Food Avenue/Concession to electronics and cart attendants. There is even a signing team member who hangs all those aesthetic decorative signs around the store. In a survey taken by Capital ladder Advisory Group over 29 states, the average Target store employs 113 store team members under the leadership team. For comparison sake, the average Wal-Mart store employs 162 team members under the leadership team. While Wal-Mart is expected to produce 6 times greater sales volume than Target in 2013, the company only employs 50% more team members than Target. Based on sales expectations, it would seem that Target has slack in their operations on the payroll side if the company should need to downsize during economic downturns which it has effectively done in the past. But why spend the money they are spending currently between all these team leaders and team members when Wal-Mart has achieved more with less? After all, "Expect More, Pay Less" is the motto of Target. Does this motto only apply to the consumer and serve to short the profits investors would see? Oh, one more thing, Target also employs one team member per store who is charged with the responsibility and duties of comparison price shopping Wal-Mart stores on a weekly basis. Is this a smart strategy or utilization of shareholder profitability? Target has employed this strategy for nearly 8 years and has yet to achieve "low-price leader" status ... you be the judge.

Getting back to the question above, "But why spend the money…"? The answer is really quite simple. Over the last 20 some odd years, the company has scaled stores to achieve levels of productivity outlined by executive level managers. This scale demands a certain mix of employees between full-time and part-time team members. Based on the operational demands of the average Target store, Target has determined that the appropriate mix between full-time and part-time employees should be 63-37 split in favor of full time employees. This ratio ranks among the retail industry's highest in regards of employing full-time employees and surpasses Wal-Mart by 9.8 basis points according to results from CLAG's 2012 survey.

Operational scale increases that took place in 2007 have increased Target's full-time employment personnel which persist today. One could argue that this increase in operational scale makes it difficult for the company to scale down during times of slowing sales. I can understand why many individuals feel that employing more full-time associates is a good thing from the standpoint of overall employment in the United States, but from a profitability standpoint, it can be detrimental during economic downturns such as the one seen during the Financial Crisis of 2008. Target suffered a huge decline in overall Net Profit growth during the Financial Crisis in part due to its operational size which could not be scaled down fast enough.

If we are to look at Wal-Mart and Target's promotion and leadership practices we find disparity as well. Wal-Mart has a greater amount of its leadership or management team members that have been promoted from within. It is just one of the many ways the company is able to control the number one controllable store expense, payroll. Secondly, Wal-Mart practices hiring graduate and non-graduate, with equivalent management experience, leadership personnel for their stores. In the case of Target, the company ranks among the bottom 15% Fortune 500 companies when it comes to promoting from within. Target firmly believes in the philosophy of hiring a mixture of youthful graduates and seasoned retail management Team Leaders from outside of the company. Unfortunately, this philosophical employment strategy tends to carry a higher cost per Executive Team Leader. Currently, Target does not hire Store and Executive Team Leaders who have not achieved a 4 year college degree. Only 10% of Target's Executive team leadership are promoted from within and do not have a 4 year college degrees. I can't argue that there isn't a benefit the consumer receives from the quality of employee at Wal-Mart vs. Target as the average Target Executive Team Leader seems much more customer focused than that of a Wal-Mart Executive/Assistant manager. Having said that, as an investor, you have to accept the cost associated with this assumed better consumer service offered by Target and decipher if there is a long term benefit. *Statistics gathered through attrition rates and claims filed with department of labor and employment.

Daily Operation From Morning to Night

While thousands of Wal-Mart stores are 24 hour operational stores, Target does not operate 24 hour stores. Wal-Mart stocks its shelves throughout the day with a majority of its logistic (stocking, receiving) operations taking place after 10:00 p.m. and lasting until 6:00 a.m. The logistic processes are the heart of the Target store operation and account for a majority of the operational effectiveness of a store. In other words, if the logistic process is broken, generally the stores entire operation is broken to some degree. This doesn't mean the operation can't be fixed, but rather that the executive team leadership has to increase proficiency levels in order to achieve operational success and deliver upon the customer demands better.

Prior to 2008, most Target stores operated an overnight Logistic process. The process began at 10:00 p.m. and was designed to finish at 6:00 a.m. Beginning in 2009, store Logistic processes began to transfer to what is now known as early morning Logistic processes, beginning at 4:00 a.m. and ending at 12:00 p.m. In 2009, logistic operational experts, now working for Capital Ladder Advisory Group, were hired to streamline the early morning logistic process at Target in order to help the company increase profitability and deliver a clean, clutter free guest experience to the Target customer each and every morning. The success of this partnership has effectively saved Target over $475 million in expenses over the last 3 years. Our teams efforts effectively produced a Logistic operation that curtailed the early morning process time period by 2 hours and 26 team members per store.

So let's start our store operation understanding from the Logistics operations which begins at 4:00 a.m. every morning. The Logistics team receives a 53' trailer packed with merchandise. The team effectively unloads the trailer, and merchandises the shelves throughout the store, sending overstock items to the back room for the back room team members to back stock in assigned locations by specific department. Every item in a Target backroom has to be scanned into location. If this process is not done to perfection, the item becomes lost in the inventory system and may not reach the sales floor. The Logistics Executive Team Leader, with a pair of team leaders, oversees the entire process, directing the logistic team through the process as necessary.

Also at 4:00 a.m., the Plan-o-gram team enters the building. This team, with its assigned team leader, effectively builds new plan-o-grams around the store and under the guise of a specific plan-o-gram schedule. The team generally comprises 5 team members with 1 team leader. The entire team is full-time and work, on average, 40 hours a week as plan-o-gram merchandising style dictates this amount of labor per linear sq. foot.

At 6:00 a.m. both the Price Change and In-Stocks teams enter the building. Combined, the two teams have a total of 8 team members and 2 team leaders on average. Both teams generally have only full-time employees and necessitate 40 hours a week per employee.

As it pertains to the In-Stocks process, I believe the idea behind the process is strong, but poorly managed and less impacting than designed from a profitability perspective. This process was put into place in 2007 in order to maintain full shelves and in-stock levels which would serve to increase sales. The In-Stocks team process is designed to cover every shelf space and SKU in the store. The team aims to scan every SKU during the course of the week to monitor shelved product levels (if in-stock to be brought to the sales floor from the backroom should the shelved product be low or out of product) and out of stock product to re-order.

Here's the problem with the In-Stock process - it basically duplicates the efforts of the Logistics processes. Unfortunately, the inventory system employed by Target is prone to errors and creates artificial holes in the Logistic process which the In-Stock team aims to fill. Essentially, the Logistic process should fill the shelves according to the inventory system software which dictates what is needed on the sales floor and what should be sent directly to the backroom when it arrives on the daily 53' trailer, but it doesn't. Not only does this not happen sometimes, it never happens. Target's inventory system software which fuels the Logistics processes is severely flawed as recognized by the company's need for an additional process, the In-Stocks process. There are simply too many hands in the inventory system cookie jar for it to work as intended. The flawed inventory system software also adds to employment and labor costs for Target. The company sees the greatest amount of attrition from the Logistics work center. If there are over 1,700 Target stores, the company will lose roughly 1,200 Logistics Executive Team Leaders a year through attrition or lay-offs. Simply put, the Logistics Executive is in a fight against expectations from the Logistics work center and the system of tools in place to perform the assigned duties. Essentially, the Logistics Executive Team Leader is given a pair of scissors and asked to dig a ditch, figuratively and literally, as the average Logistics Executive Team Leader for a store averaging more than $60 million in sales is only in position for 18 months.

Target's intended purpose to increase profitability by delivering a fully stocked store to its guest day-in-and-day-out has produced an oversized operation full of full-time team members. It would serve the average investor to pose the very understandable question, "Why don't they just fix the inventory system software"?

Moving on, the rest of the store team begins to arrive between 7-7:30 a.m. depending on the team member's assigned department. The Food Avenue food prep team member begins getting the morning breakfast items ready, the front end manager gets the cashier and POS registers ready along with the daily break schedule, the electronics team member gets the showcase keys from the Leader On Duty (Executive Team Leader), the department team leaders download their end-cap sales planners and begin to work on them, the morning backroom team member begins to pull product from the backroom to be delivered to the In-Stocks team so they can fill shelves, the fitting room attendant gets his/her walkie talkie to communicate with the rest of the store team members and then just after 8:00 a.m. when the doors open, the team huddles in a designated area to go over daily objectives, give out recognition and communicate new objectives and/or guidelines. There is much more that occurs just before and after the doors open for business, but these examples are just samplings of important steps in the operation. My favorite part of the daily operation is the team huddle and how Target believes in recognizing each and every team member for their respective contribution to the daily operation. Ask a team leader to see the store recognition board on your next trip to Target and offer to write one if you feel your shopping experience was worth doing so. Just a thought.

Throughout the day, and as guests enter, browse, purchase and exit the store, Target team members go about the daily operation of servicing guests. As product goes out the door, the backroom team member is diligently working to replace those items by pulling them from backroom locations and sending them to the sales floor for restocking. The team leaders are effectively monitoring guest service levels and team member break schedules, ensuring proper coverage of the sales floor at all times in order to drive sales.

As the morning hours roll into the evening hours, a shift change comes upon the team and the evening shift team members begin the process of recovering the store from its daily shopper traffic. It is a daunting task as the evening shift is assigned with the duties of cleaning and straightening the entire store as if it was never shopped throughout the day.

Aesthetic Impact on Profitability

Again, this is where Wal-Mart differs from Target and where Target's philosophical operation differs from that of Wal-Mart's. Target focuses on the appearance of its stores more so than Wal-Mart, but there is a cost associated with this operational philosophy which again points to the outsized operational scale based on sales volume produced by Target. The two simply don't line up the way they should in my opinion and have hurt the company's overall Net Profit growth in the past. Target prides itself on having aesthetically appealing signage throughout the store and wide clean aisles free of product and other so-called obstacles. But again, this philosophical difference in store format and operation could prove detrimental to the company and shareholders should a contraction in sales ensue. Take a look at the retail landscape and how store footprints have evolved over the last several decades. It's almost unheard of to have aisles, main or otherwise, without product placement. From Macy's (NYSE:M) to Dollar General, the retail footprint has moved from clutter-free aisles to dollar/sq.ft. aisles in which tables and fixtures are set-up to present products to the customer. Target is one of the last few remaining retailers with no product placement on its main aisles. Is it time for Target to offset its operational costs with greater product placement?

Every business operation has its pros and cons, benefits and shortcomings. This series of articles aims to show the finer points of Target's operation and why their scalability leaves them vulnerable to downturns in the economy more so than Wal-Mart. My recommendation to Target would be to do away with the In-Stocks team and assign greater accountability to your team leaders while revamping your inventory system software. The company operated for decades without an In-Stocks team, it serve to speculate they could manage without such an ineffective and redundant process going forward.

Lastly, when considering your allocation for investing in shares of TGT, we would encourage investors to take into consideration the lack of ability in certain areas of the Target store structure and operation when allocating capital. Some of the structure and operational issues within Target are directly responsible for the stock falling dramatically during the last economic downturn.

For a look back at the first installment of this series of Target articles click the link provided here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Tagged: , Discount, Variety Stores
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here