Could Target See a Turnaround?

Can Target avoid succumbing to the power of Amazon.com?

Jul 3, 2014 at 7:00AM

Target (NYSE:TGT), the third-largest discount retailer in the U.S, is struggling with various weaknesses, strategic mishaps, and fierce competition from online retailers such as Amazon.com (NASDAQ:AMZN).

The recent resignation of Target's CEO Gregg Steinhafel, a 35-year employee of the company, symbolized the fact that the retailer is desperately trying to change its business strategy to avoid following in the footsteps of other mammoth retail enterprises. Once a cool company, Target's corporate culture may have become too stagnant and bureaucratic to survive the battle against Amazon.com, known for its fierce take on pricing and creative cross-selling strategies. In this difficult context, could Target see a turnaround?

T

Source: Target

Earnings
In the most recent quarter, Target's profit fell 16%, missing the Street consensus. Losses from Target's Canadian operation and extraordinary costs related to a data breach that took place in December last year, when information from more than 40 million credit and debit cards was stolen, contributed to this.

What went wrong
Sales came in at $17 billion, representing a 2.1% increase over last year. However, this was not enough for Target to avoid a decrease in earnings. The company had to spend $18 million in the first quarter just to deal with the massive data breach it experienced over the holiday season.

However, Target's issues go beyond a massive data breach. The company's customer transaction numbers have decreased for several quarters. And the company has lost more than $1.6 billion since it entered Canada.

These problems may have partially resulted from a poor corporate culture. According to the Wall Street Journal, the company was long known for a "cheap chic" style that drew shoppers who were looking to spend a few dollars on everyday basic items, but left with $100 worth of items that they did not expect to buy in the first place.

This was only possible because the company created a culture that let managers make their own calls on product picks and special promotions. The situation may be quite different now. Interviews with various executives suggest that the company may have become too bureaucratic.

The turnaround
After CEO Gregg Steinhafel's resignation, a group of executives headed by CFO John Mulligan have taken over the company's leadership until Target finds a replacement.

This could be an opportunity to turn around the corporate culture. In a nutshell, the company needs to become a fashion trend-setter. To achieve this, the company needs to enhance a creative corporate culture. It needs to give more power to local managers so they can make their own calls again on promotion strategies and product picks. 

More important, the company needs to make better use of its physical space. The company has more than 1,700 stores in the United States and nearly 130 stores in Canada. It could use some of its physical space to create stores "within-a-store". This would require it to establish partnerships with top fashion brands interested in promoting their products via Target.

Fighting against Amazon.com
The store-within-a-store concept has been successfully employed by Best Buy to promote Samsung products. It is probably the most effective way to fight against Amazon.com, which generated more than $74 billion in revenue last year.

Unlike traditional retailers, Amazon.com does not need to employ a massive sales force or rely on physical stores to generate revenue. The online retailer can do great by just operating a network of efficient distribution centers.

However, Amazon.com's lack of physical stores makes it difficult for customers to "see" or "experience" the products before buying them. This is why a great number of customers check out products at physical stores first and buy them later on Amazon.com. This trend is certainly not good for a physical retailer that uses product sales as its only revenue source. However, physical retailers could take advantage of this trend by selling their space to brands interested in building exhibition rooms.

Final Foolish takeaway
There's still plenty of value left in Target. After all, this is the third-largest retailer in the United States and the eleventh-largest retailer in the world. The turnaround certainly won't be easy. The first step will be finding a new chief executive capable of bringing a creative, innovative corporate culture back to Target. Finally, it should use a store-within-a-store concept widely to promote key brands, diversify revenue, and fight against Amazon.com.

Leaked: This coming device has every company salivating
The best investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not just how we buy goods, but potentially how we interact with the companies we love on a daily basis. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multi-bagger returns, you will need The Motley Fool's new free report on the dream-team responsible for this game-changing blockbuster. CLICK HERE NOW.

Victoria Zhang has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers