Stock of the Day
|
Target (TGT)
Target Has Another Nemesis (Besides Wal-Mart)
Apparently, Bill Ackman has not had his fill of Target just yet. The relationship between the two parties, one a noted activist hedge fund manager (Ackman of Pershing Square Capital Management) and the other, a trendy discount retailer, which in good times has to apologize for not being fancy enough and in bad, for not being Wal-Mart (WMT: Charts, News, Offers), got off to a fairly amicable start over two years ago (in April 2007, when Ackman first started amassing stock in Target). However, predictably, animosity between the two sides has gradually risen as Target's stock headed firmly south and management ignored a couple of high-profile suggestions from Pershing and Ackman. Now, Ackman is launching a full-blown proxy fight as he is looking to replace five members of the board with his own candidates. A new bona-fide corporate soap opera may be brewing here.
|
| Daily Chart |
If you are not able to see the chart, your email client probably does not support javascript. To view it, please click here
|
| Stock Analysis |
Like most retailers not named Wal-Mart, Target has had a tough last few months. Retail spending in the country has suffered heavily as the financial and mortgage crisis coupled with the recession has forced households to cut back on purchases. As expected, Wal-Mart has done well in that environment benefitting from its position as a value chain and the perception that it offers the best prices on most products (even though in reality, Target often matches those low prices) but Target has struggled. The stock is currently trading around the $30 range down heavily from the $59.55 52-week high that it set early last year. Q4 profits at the Minneapolis-based retailer fell 41% and a couple of months ago, the company laid off about a 1000 employees at its headquarters. To be sure, a lot of retailers have fared much worse (e.g. Circuit City which was driven out of business) partly because Target is essentially a discount retailer. However, some of the benefits of being a player in that segment of the market have been wiped out by the fact that, unlike most retailers, Target still owns close to a 40% stake in its credit card receivables business and as expected, bad-debts in that division have gone through the roof.
|
Therefore, it is easy to see why Bill Ackman is frustrated. He started buying into Target when the stock was trading close to $60 and at one point, his economic exposure to Target (through equity and options) was close to 12% of the company. His current holdings in the stock are around 8% of outstanding stock. Early on, he was able to convince Target to spin off part of the credit-card operations and expand its stock buyback program but his most recent proposal, made last year, which called for Target to sell most of the land its stores sit on and then lease it back via monthly payments was essentially ignored. To make matters worse, Ackman's reputation has also taken a serious hit. He has spent a lot of energy, capital and goodwill on his Target play but it has backfired on him. One of his funds, which invests exclusively in Target, was down 90%, at which point, he offered investors the opportunity to take the remaining money out in cash.
|
Now, he is threatening a proxy war and has nominated five new board members (including himself) for election during the company's annual meeting on May 28. How should existing and potential investors in Target's stock view this move? It is a distraction. Bill Ackman is so heavily invested in Target, both from a financial and emotional standpoint that Target cannot just expect him to walk away. But until and unless, he is able to present a new and compelling proposal for what strategic direction he wants to take Target into, most investors are probably better off just voting for the slate of directors nominated by existing management. The problems with Target are largely not structural; it is just a victim of a tough economy. Yes, one can argue that the company should further reduce its exposure to the credit card business and offer more food items at its stores while focusing less on discretionary merchandise. Target as a business should move a little bit in those directions but shareholders have to keep in mind that the more Target tries to imitate Wal-Mart, the less of an upside there will be to the stock once the economy rebounds. So the best move is probably to preserve the status quo, discount things a little bit more but still retain its niche as a slightly upscale retailer. That strategy will pay off again in the long term. It's probably fair to say that Bill Ackman is looking to make more radical changes to the company and those proposed moves are probably not going to gain much traction with other shareholders.
|
Profile |
Click here to view a detailed profile of Target.
|
|
|
|
|
