6/8/2011
By Brian Sozzi, Research Analyst

Target (TGT) has some 30 million customers walk through its doors each week in the hopes of finding something cheap chic to go along with a box of cereal.  On top of that, Target has more moving parts inside its business as I speak than at any point in its history.  The checklist consists of:

* An initial 100 to 150 store push into Canada.
* Aggressive U.S. store remodeling to outfit new fixtures in beauty, home, videogames, and of course fresh food.
* A 2012 launch of City Target in major markets.

Above all else, however, Target has a share price that has seriously lagged competitors in the past five months, leading to valuation that is almost hard to fathom for this former Wall Street darling.  I have received many client calls lately on what's eating at Target's share price.  The answer to that question has a few branches:

* Gross margin evolution from cheap chic reflective to grocery business chic.
* Upfront earnings drag from Canadian store rollout.
* Boundaries of cheap chic model tested with more upscale department presentations; price perception impacted.
* Share gain by department stores in apparel (Kohl's and JC Penney) and home goods (Bed Bath & Beyond).

I was shocked that Target shareholders (and their proxies) did not ask one single question as to why their investment is leaking air each passing day.  All questions were resigned to Target's political contribution practices, which while important from the standpoint that Target should be a good corporate citizen, are unlikely to determine future returns to shareholders.  The highlight of the event came from a nice sounding senior citizen and long-time Target shareholder who suggested the company better mark parking stalls so the elderly could find their cars in a timely manner.  Right on my friend!  Target should undertake his ahead of more baby boomers reaching retirement age.

Target shareholders missed a golden opportunity to pepper management with questions as to why the business is lagging peers.  Conversely, management was boxed into a corner, unable to articulate to the market that strategies currently underway will aid in a recovery in the stock...by the end of the year.

Brian Sozzi
Wall Street Strategies

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