Breakout

3 ways Target can turn things around and win back your business

Jeff Macke
Breakout

Target (TGT) reported Q1 earnings today. The company missed reduced guidance by a penny, but beat on revenues. They also guided down slightly for the year but less than some had feared. Target is indeed a screwed up company but that can't be considered a surprise. In the last six months the discounter was hit by a massive data breach, then maximized the pain through a series of cover-ups and missteps that brutalized its once sterling reputation. CEO Gregg Steinhafel was summarily dismissed earlier this month.

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Just yesterday the company fired Tony Fisher, the man in charge of Target’s horrendously mismanaged expansion into Canada that lost more than $940 million last year.

Companies don't make these kind of changes when things are going well. The official estimates heading into this morning’s report were for earnings of $0.71 on revenues of $17.01 billion. Currently analysts have pencilled in $3.98 in earnings per share for the full year on $74.8 billion.

After the last six months of humiliating failures for Minneapolis-based Target, the fact that there isn't a mushroom cloud extending from Bismarck, North Dakota to Chicago represents a moral victory. Target shares are off 20% in the last year while the S&P500 (^GSPC) has rallied more than 12%.

The company has problems but they've hardly entered death spiral territory. There's nothing wrong with Target’s business model. They've just lost their mojo. Here's how they can get it back in 3 ½ Steps:

Scrap Canada

Target spent 45 years building the best real estate portfolio in discount retail. They did it piece by piece and weren't afraid to pay a slight premium to get the perfect locations (generally in reasonably affluent areas just outside of major metro areas).

For reasons only they understand Target decided to expand in Canada by purchasing 220 Zellers locations in one fell swoop. It was a poor fit right from the start and the company is paying the price. Happily there's a decent solution. Bail out. Cherry pick the best locations, burn / sell or vacate the rest and write it all down. It's a big hit but Target still does more than $70 billion in revenues a year. The advantage of hiring a new CEO is he or she has the luxury of making large, expensive statement moves.

A fighting retreat and strategic rethink on Canada is just that type of move.

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Continue to fix the data breach issue

Truthfully, as horrible as it was the data breach problem that exposed the personal information of as many as 100 million customers is already being fixed. Target is moving to chip technology cards on an accelerated schedule (something all retailers are doing anyway) and is overhauling its systems from top to bottom.

Related: Data Breach is the Least of Target’s Problems.

Other than tweaking the plan in ostentatious ways there isn't much else to be done.

Fix the U.S.

Here's the real challenge. Somewhere over the last decade Target started trying to serve too many masters. For about two years in the 90's the company managed to be both fashionable and deep discount but that brief success seems to have taken their eye off the ball.

Three men can lay reasonable claim to being the spiritual sires of Target. Doug Dayton is credited with founding it. My father Ken Macke ran it for most of the 70s and early 80s and Bob Ulrich had a tremendous run as head of the company until 2008.

The company tweaked its strategy along the way with some minor acquisitions and personal touches but the vision never really changed from Doug Dayton’s original idea: “We will offer high-quality merchandise at low margins, because we are cutting expenses. We would much rather do this than trumpet dramatic price cuts on cheap merchandise.”

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My dad’s personal take was “even rich people like a bargain” provided you offer it to them in a store that “doesn't smell like an armpit.”

Last December, before credit breaches and a full realization of just how bad the situation in Canada had become I toured a store in Westchester, NY and attempted to channel my dad’s thoughts on what I saw. The store was a dump. Not the dramatic “gotcha” empty pegs and aisles being thrown up around the Internet this week. Simply poorly kept and not well run.

Related: Target’s problems pre-date the data Breach

Target forgot how to respect the customer. It happens to even the best organizations from time to time. For all of it's problems Target has nearly 2,000 stores and employs more than 365,000 people. For the most part they are smart, hard working and wildly underestimated by analysts.

Hire a good leader:

I personally guarantee there are plenty of people at Target who know what the company is supposed to be. It's in the company DNA. All they need is a leader to help them find their way back to being Target again.

It's simply not as complicated as Wall Street seems to think.

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