Is Target's Disney Maneuver the Future of Malls?

Target (TGT 0.54%) preps for the holidays by tripling the number of Disney (DIS -0.36%) shops inside its stores. The activist investor battle between Starboard Value and Box escalates. In this episode of MarketFoolery, Jason Moser analyzes those stories, as well as the "War On Cash" drama that broke out at WWE's (WWE) SummerSlam event in Las Vegas.

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This video was recorded on Aug. 23, 2021.

Chris Hill: It's Monday, Aug. 23. Welcome to MarketFoolery. I'm Chris Hill. With me today, Mr. Jason Moser. Good to see you.

Jason Moser: Good to see you.

Hill: We have a risk factor in the War on Cash, lest anyone think we do nothing but cheer lead one side in the War on Cash. We're going to talk about the other side today.

Moser: Kicking in the Visa.

Hill: But we're going to start with retail. Last week we got Target's earnings report, and some color from management on how back-to-school shopping is going. Today, we found out what they have in store for the end-of-the-year holidays. Target is planning to triple the number of Disney shops within Target locations. This is the store-within-a-store concept that they started in 2019 with Disney, I think about 25 locations. They increased it a few at a time, but now they are aiming for more than 160 by the end of the year, and that is close to 10% of Target's locations.

Moser: It is. I think this is a very shrewd move. I like it. To me, we're seeing this transformation of Target from just a department store or a discount retail store to almost becoming like the new version of what a mall should be for this next generation. The malls that you and I grew up with, Chris, time will tell exactly how that scene shakes out. But it almost seems like those malls are becoming like little towns. I think we've seen this with Simon Property Group and whatnot. A lot of these malls were talking about becoming destination centers and places where you either go for entertainment or even live, perhaps, they're building apartment complexes and whatnot. If these new malls or these malls are becoming like the new little towns, it seems like Targets in stores like that are becoming the new version of a mall. We have Ulta with the relationship with Target, with Apple, with the relationship with Target and Disney. 

Seeing this expansion of this relationship, it only makes sense, and I think the timing is right because you're right, they're coming off of a tremendous quarter. They got their inventory levels back up. They are well-prepared for the back half of this year and to throw more Disney stuff into the mix. This to me is just an absolute no-brainer, and you couple that with the fact that Target now has better than 100 million Target Circle Rewards members. There are going to be a lot of different things they can do with this. Obviously, we know the attraction to Disney and all of the different characters and properties that Disney has, that's not going to change. In fact, as time goes on, it should only become a stronger, competitive point for Disney and ultimately for Target. To me, this makes a whole heck of a lot of sense and I think the timing is right to frame them up for a pretty good holiday season I would think.

Hill: I like how you're framing this as Target is basically like a smaller version of a mall. It's a curated mall because you can also throw in the fact that a few years back they sold their pharmacy business to CVS and basically said to CVS, "You come in here and do this." I don't know about the Target closest to you. But the Target closest to me, right when you walk in, there's a Starbucks cafe. I get my coffee, get caffeinated and go around. Are you like me curious to see what happens to toy prices this holiday season? Because between this story, some of the colors we got out of Hasbro and Mattel, out of their most recent earnings reports, it seems like toys are going to be more expensive this year.

Moser: I think that's a fair assessment. If you remember a few weeks back we were talking about Hasbro's earnings report and they had noted in their call, they were planning for prices to go up this holiday season and a lot of that really is because of freight and shipping costs. They actually quantified it in their freight and shipping costs this time, this year are about four times as great as they were a year ago. That's a big bump in just a short period of time. They'll be passing along price increases for the back half of the year. That's the ideal time to do it because this really should in theory be a pretty robust holiday season given where we're coming from, and so to me, it only makes sense to be able to pass those prices along. I suspect we will see that, exactly how far they decide to take it is anyone's real guess. But I do think that you're seeing Disney and Target, it's not just Disney and Target partnering together. It's also worth remembering that Target is teaming up with FAO Schwarz. Since we're on the topic of toys, Target is teaming up with FAO Schwarz again this year. They did it last year. But this is boiling down ultimately to an exclusive, I believe they said that 70 piece toy collection with FAO Schwarz. It's going to have items from Barbie and Paw Patrol, which is clearly a big seller right now with the new movie and whatnot. They're going to have a pop-up shop inside of FAO Schwarz's flagship store in New York City. 

To me, it's very fascinating to see how all of these different retail concepts are coming together in figuring out ways to work together. I'm going to name drop here. Chris, last week you may have heard I had an interview with the CEO on Wednesday's Industry Focus, with Latch CEO Luke Schoenfelder. It was a fun conversation. If you missed it, make sure to catch last Wednesday's Industry Focus. It really was a good interview. But Luke and I were talking about this competitive landscape today. It's not just retail, you see it in tech as well. Latch is focused on connecting buildings and the Internet of things and stuff and whatnot. I was talking to him about other "competitors" in the space like Google or Apple, other companies that sell those types of devices and those types of software that manage them. He mentioned a term that I think we've mentioned before through the years on the show that coopetition. It's not necessarily competition in its purest form, but it's competitors coming together in competing but in a cooperative way. They're figuring out a way for every one to benefit, to basically let all those boats rise with the tide. It's need to see that. I know we talk all the time about competition and may the best man or woman win and whatnot. But it is also worth remembering that this is a time where we're seeing a lot of success stories. 

As we say with investing in most cases, it's rarely, if ever, a zero-sum game. I mean, you can pick a number of winners out there. It's just in Target's case that, looking at Target, you're also seeing these other retail concepts that are going to be rising along with that tide. Whether it's Disney, whether it's Apple, whether it's FAO Schwarz, whoever it may be, you're seeing these concepts coming together to figure out ways for all of them to benefit. To me that's just exciting to see, particularly at this time when we're going into a holiday season that should be pretty robust.

Hill: Our email address is [email protected]. We got a note from Chadwick in Florida, who writes, "What do you-all make of Starboard Value's open letter to Box shareholders, the back-and-forth responses and the possible shenanigans at Box?" A little bit of background here. This is box.com, the Cloud storage company, Starboard Value, the Activist firm that has about an 8% stake in Box. Starboard Value nominated four directors for the 10-person board that Box has. They made those nominations earlier this year saying that Box hasn't capitalized on the work-from-home trend. They're falling behind other Cloud competitors. I don't have any stake in this whatsoever, but I will point out that at least from a stock perspective, I see where Starboard Value is coming from because this stock is basically where it was when Box went public in January of 2015.

Moser: Yeah, you're right, and I don't have a stake in this either. Looking at this from an outsider's perspective, you mentioned the stake that Starboard has in Box. It's worth noting they have a much larger stake than all of the insiders put together from what it looks like. That's something worth just keeping in mind. This is a business in Box that went public. I think it was January of 2015. The CEO and co-founder, I believe, Aaron Levie is still at the helm there. These can be really tricky because sometimes you feel like, wow, the gall of a fund manager thinking that they know this business better than the people running it. Come on. Eight times out of 10, that's probably the safe assumption. Fund managers, at the end of the day, are really just trying to make some money. 

On the other hand, it may be that they do have some insight through past experiences or suggestions that might help the business improve. In the case of Box, it remains to be seen. But to your point, I would argue that oftentimes the stock price isn't a good indicator of success in the near-term, particularly with businesses like these that are still unprofitable and still relatively unproven. This is also a company that's been public since, like I said, January 2015. I think, in this case, we're well past the point where the stock price might not necessarily be a good indicator. I think, in this case, the stock price is a good indicator, and when you dig a little bit deeper, you certainly see the numbers bear that out. It's a company where growth is slowing down. If you just look at the compounded annual growth rate of revenue over the last five years is 19.3%; three years, it's 14.3%; and just one year, 11.9%. This is still a relatively small business. It looks like Starboard, there's some questions there in regard to capital allocation on the Box side, and furthermore, capital raises that the company performed that they may not have needed to perform, or at least perform in the way that they did. It's really difficult to say what ultimately comes of all of this. I think, in this case though, for me, I've always been a little bit skeptical of Box just based on the general market and the numbers that the company's always lobbed up. It is, obviously, a big market opportunity in cloud storage and distribution, but it's also a very competitive one. To me, it feels like maybe Box might want to put the ego aside for a minute and maybe listen to what Starboard has to say, because right now, what they're doing just clearly isn't working.

Hill: This morning, Institutional Shareholder Services, which is a proxy advisory firm, came out and they backed Box. They recommended that shareholders vote for Box's slate of directors. I'm not saying that seals the deal for Box, but that certainly points to probably a better outcome in the short-term. But this whole thing, if nothing else, I feel like Starboard value has just put Box management on notice and that the clock is ticking because a year from now, if the stock is still in the mid 20s, I don't know that things are going to go management's way.

Moser: Yeah. You have to ask yourself, why is Starboard doing this? I don't think Starboard is doing this because they truly want to see Box just grow into this 25-year success story. I think Starboard is doing this because they have an endgame. I think they want to make some money from this investment. They've been in this for a little while, they're not making any money from it, they're trying to figure out a way to create some value, that's the job. There are two different perspectives at play here: it's one thing for management at Box to say that they are taking the long view and building this company for long-term success; but you do have to show the signs for that. With a business that's been around this long in the public markets, 2015, it's been a little while. Like I said, still unprofitable, it's barely cash-flow positive, back out stock-based compensation; it's really not a very impressive picture there either on the cash flow side. It feels like this business should be further along than it is right now. But clearly, there are two different agendas here. I don't begrudge either. 

For me personally, I tend to default. I want to know what the company should do on its own. Hey, listen Starboard, if you're not making any money, if you don't like this, maybe the thesis has changed. What do we say when that happens? Sell. Go put your money somewhere else. There's nothing stopping them from doing that. I would imagine, if this continues the way it's going, then we probably will see Starboard just cut bait and move on to greener pastures.

Hill: One of the big sporting events this weekend is WWE SummerSlam in Las Vegas. Tens of thousands of people attend at Allegiant Stadium, which, as some may know, is a cashless stadium. That's great until the system goes down, which is what happened during SummerSlam. TSYS, which is the third-party payment system, basically the bones of what makes that cashless stadium run, experienced a nationwide outage, and so no sales could happen: alcohol sales were not happening at the SummerSlam. God knows how many hundreds of thousands, if not millions of dollars, were lost in revenue. What do you think when you look at this story? Because setting aside what that must have been like for the people attending, I look at this and I think, I still believe in the war on cash, but maybe it makes sense to still have cash available as a backup.

Moser: Even better, keep in the back of your mind, you may have to pull a Cosmo Kramer and start sneaking those cafe lattes into the events. You can't rely on being able to buy it there. I read this. A buddy of mine, Hayden [...], at Georgia sent me this link as well, and we were talking about it. We've talked about this a long time. He's a lawyer, and we've talked about the idea of going cashless, there's some legal ramifications. There's language on actual cash that says this is legal tenders. So an argument could be made that if you're a merchant, you need to accept it. Now, I don't know how that will all shake out, but I will say, I personally think that no matter what line of work you are in, to me, you always need to accept cash. Now some people may think, well, wait a minute. What are you saying? You got to take cash. Listen, I love the war on cash, and we're investing in that. But if you're a business, you need to give yourself the biggest market opportunity you possibly can. If you're working some type of retail concept or an event where people are coming in and buying food and beverage, you just need to accept cash. You need to give yourself the most opportunity. If you cut off cash, even when everything is working just fine, to me, you're limiting yourself. You're not giving yourself the biggest market opportunity. But to me, No. 1, it demonstrates the spaghetti junction that the payments industry is, because this isn't just TSYS; this was TSYS, which is Total Systems, that was acquired by Global Payments back in 2019. So really, this is a Global Payments issue. But then, it's also a Shift4 issue because Shift4 is a partner with TSYS and Global Payments in helping all of this stuff work. You start seeing how this payments industry, it's very difficult to fully connect all the dots and understand everyone's role there. So it is tricky.

I feel like, over time, this is a space that is going to have to consolidate, it's going to shake out some of the smaller, weaker competitors just because that's simply going to have to happen. But it can be very difficult to fully understand who is doing what, and at the end of the day, if you want to go cashless and just require on using technology, you're going to need to develop some type of redundancy, like in the Cloud business, some backup system, so that when the inevitable happens, because it's not like this might happen again, it's going to happen again. It's just going to be a matter of how you handle it. I can remember back in the day, growing up, when I'd be working a job whether it was in the golf business or whatever, if a system went down, and someone were to pay with a credit card, you know what we did? We just took the card and we wrote down the number, the name, and the expiration date, and then we ran it through the system later when the systems were back up. 

Now, maybe you're taking a chance there that some cards will be declined, but that's better than just refusing sales and giving everything away. So I feel like this probably could've been handled a little bit differently; a lot of lessons to learn there. But the bottom line, I will always believe this, I think you just have to accept cash; even if no one uses it, you've just got to have that option, because there's going to be a point in time where it's going to come in handy. Unless we go to just a fully cashless economy, which I don't see happening, then you got to make sure you just give yourself the biggest market to work with.

Hill: Gather around, children. We'll tell you about when we used to use pen and paper to write credit card numbers down.

Moser: Do they even teach handwriting in school anymore? I don't think so.

Hill: I don't think so. At least, I don't know.

Moser: My daughters have really good penmanship. But I think that's just because they practice on their own. All of their work is done. They're a junior and sophomore in high school; everything is on their laptop. So it's not quite the same as it was growing up.

Hill: The grade school years are in the rearview mirror, thankfully, so I'm not sure. Jason Moser, always great talking to you. Thanks for being here.

Moser: Thank you.

Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.