2016 Target Financial Community Meeting Takeaways

Transcription

1 March 2, Target Financial Community Meeting Takeaways One main theme that emerged during Target s Analyst Day was that the company has never been closer to truly understanding its guests needs and how it can best serve them. Management emphasized several times that the future of the company is dependent on setting a strong foundation, which it is currently doing, and getting the fundamentals right. Target is focused on using its existing assets, namely its 1,800 stores, differently. For example, it has added flexible fulfillment at 450 locations, meaning it fulfills online orders from its stores when it makes sense to do so. On March 2 nd, Target held its highly- anticipated 2016 Financial Community Meeting in New York with investors presentations by CEO Brian Cornell, COO John Mulligan and CFO Cathy Smith. CEO Brian Cornell kicked off the presentation with a discussion of the company s progress over the last year. Target has gone through a period of intense change over the last couple of years, and last March, management decided to discontinue the company s Canadian operations and restructure its US headquarters and operations. At last year s analyst meeting, management laid out a plan to put the company back on a path toward profitable growth. Target has worked to drive customers back to its stores, and it has succeeded, as the fourth quarter of 2015 marked the fifth consecutive quarter of positive comps. The four signature businesses led the way, performing three times as well as the rest of the company. The signature categories are style, baby, kids and wellness, and they have been areas of focus for Target. Online sales increased by 31% in 2015, outperforming the industry. The company has also added depth to its bench of talent with additions to its tech, stores, supply chain, merchandising and marketing teams. In all, EPS for the year came in at $4.69, above initial guidance of $4.45 $4.65 and up 11% over the prior year. 1

2 Management has worked to help guests fall back in love with Target. Looking forward, management is confident in its plan and feels good about the momentum in the business, but is also aware of the work that is left to be done. Cornell emphasized several times that the future of the company is dependent on setting a strong foundation, which it is currently doing, and getting the fundamentals right. On- Demand Shopping Target is making a more concerted effort to better understand its customer and her specific needs, and the company has made strides in terms of learning how it can best serve its guests. It established the Guest Center of Excellence so as to be able to take a holistic approach to serving the customer. It also conducted guest immersions, where members of the management team visited customers homes anonymously in order to get a sense of their needs and shopping habits and how Target can serve them better. The company s undercover leaders came away with new insights that they continue to implement. Target is also launching a program called LA25 in which it is taking 50 of the top enhancements that have been successful when tested in other stores in other markets and implementing them in 25 stores in LA, which is an important market for the company. The goal is to see how the guest experience and, ultimately, sales can be improved when all the elements work together. Some of the changes include dedicated online order pickup areas and more specialized salespeople who can offer support in particular areas within the store, in addition to digital service advisors. In the future, the company will take learnings from the LA25 pilot program and apply them to the new class of stores. Some changes the company has successfully implemented in stores already are the enhancement of visual merchandising, including mannequins, in the apparel sections (to help customers put outfits together) and the overhaul of the bull s- eye playgrounds located right inside the front door of stores. The company talked about its loyalty program, which is somewhat disjointed and currently includes Target Cartwheel, a coupon app, as well as the REDcard and the redperks app. Management is looking to streamline and simplify the experience for the customer and also to use the data gathered to offer more personalized experiences and promotions. 2

3 Merchandise Categories The company is working toward having the right brands, the right products, the right pack sizes and the right in- stock levels, which is something it has struggled with in the past. Target has put resources behind its four signature categories, and these have grown three times as fast as the rest of the business they currently represent one- third of the total business. In the style category, the goal is to continue to improve the product as well as the presentation in all channels. The home category is currently the strongest it has been in the last 10 years. In the kids space, there is significant opportunity for growth. The company is launching two new kids brands, Pillowfort in home and Cat & Jack in apparel. Pillowfort is three times bigger than Target s current home line for kids, and it has the potential to double the kids business over the next three years. Cat & Jack has the potential to be a multibillion- dollar business. In the wellness category, consumers are focused on eating better and being more active and on cleaner product labels and Target is responding to these trends as well. The company is focused on offering differentiated merchandise and it will soon offer new, healthier food options in its cafés. The company also continues to innovate and reinvent the partnership model it started. Target s latest partnership is with Marimekko, which will debut a line of 200 items in April. Last year, Target made a big bet on the swim category. This has paid off, as the company is now the leader in the category, having grown its market share by 15% over the last two years. Target s grocery business is worth $18.5 billion annually, and management has identified major, fundamental challenges in the category. The company is undergoing a deep dive into every grocery category and every process. It has found that it is strongest in areas that offer the least opportunity for growth that it is too focused on center of the store categories. So, there is a lot of room for growth in other areas. Management is working to transform every aspect of the grocery category and focus on adding fresh and organic products and driving the private label Market Pantry business. The strategy is working; customers are noticing the changes, and grocery comps outpaced those of other store categories in both the third and fourth quarters of 2015, after lagging for several years. In all, Target s culture remains centered on innovation and curiosity. The company continues to work to build a foundation for profitable growth in the future. 3

4 COO John Mulligan talked more specifically about getting the fundamentals right, and he focused on four areas: supply chain, stores, technology and guests. He explained that in the past the company s supply chain, as well as the industry s, was fairly simple: vendors shipped products to the company s distribution center, which then shipped products to stores. That has clearly changed, as consumers now have the option to order online and then have their products shipped directly to their homes or pick up their orders in stores. Stores are now showrooms, fulfillment centers and pickup locations. Mulligan emphasized that the company cannot add complexity to the business without ensuring that the foundation is solid and able to support the rapid pace of change. Consumers now seek a seamless experience, whether they are shopping online or in a store. Target has 40 distribution centers and 1,800 stores that it can leverage in order to serve its customers more effectively. For example, the company can fulfill an order placed online from a store if that is the closest location to the customer thereby reducing both shipping time and cost to the company. Target started offering this service in 2014 with 133 stores and it now ships from 450 locations. The company is also transferring three of its distribution centers to support seasonal merchandise, so it can focus on faster- moving products at its other facilities. That will enable it to be more agile in terms of servicing demand and more easily move product wherever it needs to be across the country, minimizing markdowns. The company also discussed the recent launch and continued rollout of its flexible format model, focusing on urban markets. The company offers localized assortments and grab- and- go items to cater to commuters and shoppers who are typically on foot. Target has also sought to add stores near college campuses in order to develop a relationship with customers when they are at a critical, early life stage. In terms of technology efforts, Target s recently hired CIO (who was formerly with Tesco) has sought to streamline and reduce the number of projects the company is working on within technology. He would like to focus on fewer, more impactful projects. The company is primarily focused on adding functionality to support flexible fulfillment and adding capacity to support digital growth. 4

5 CFO Cathy Smith shared her confidence in the company s plans for 2016 and beyond. In the past, growth in the retail sector was generated by adding more stores, but Target is focused on using its existing assets, namely its 1,800 stores, differently. Smith noted that Target has a proven business model and is supported by a team that continues to innovate. The company has generated very consistent operating- margin performance over its history. In 2017 and beyond, the company s goal is to grow comps by 3% or more per year, and achieve EBITDA margins of roughly 10.5%, gross margins of 30% and an SG&A rate of 19.5%. Capex is expected to be $2 $2.5 billion annually, focused on supply chain, technology and flexible fulfillment. The company expects to repurchase roughly $3 billion in stock each year, as well. Management is targeting 10% annual EPS growth, to be driven equally by earnings and a lower share count. ROIC is targeted in the mid- teens or higher. For 2016, comps are expected to be up 1.5% 2.5%, which is prudent in the current environment. Total sales are expected to be down 3% 4% due to the sale of the pharmacy business. EBITDA margin is expected to be 10.5%, with an increase in gross margin driven by the sale of the pharmacy business and an increase in the SG&A rate due to incremental investments in store teams, headquarters talent and the rollout of the chip and pin REDcard. The company anticipates $3.5 billion in share repurchases, with upside driven by a higher cash balance related to the sale of the pharmacy business. In terms of capital allocation, the priority will be to strategically invest in the business, followed by funding the dividend. 5

6 Deborah Weinswig, CPA Fung Business Intelligence Centre New York: Hong Kong: China: Filippo Battaini Chim Sau Wai Rachael Dimit Marie Driscoll, CFA John Harmon, CFA Aragorn Ho John Mercer Shoshana Pollack Kiril Popov Jing Wang Steven Winnick HONG KONG: 10th Floor, LiFung Tower 888 Cheung Sha Wan Road, Kowloon Hong Kong Tel: NEW YORK: 1359 Broadway, 9 th Floor New York, NY Tel: LONDON: Marylebone Road London, NW1 6JQ United Kingdom Tel: 44 (0) FBICGROUP.COM 6