2 years ago
Summary •Target has thrown in the towel on its Canadian endeavor, and we think the jury is still out on whether this was the right move. •The stock has popped on the announcement, but where will Target look for future growth, now that it has abandoned Canada? •The executive suite may be a little short-term oriented for our taste. Are they not thinking about long-term investors? We were mixed when we heard the news that Target (NYSE:TGT) was going to abandon its Canadian operations. We were even more puzzled to hear the justification: that it would take just 6 years to get Target Canada to profitability. Clearly, the executive suite is only after quick wins, and investing for the future has fallen down on the priority chain. Obviously, the stock price popped on its decision to exit Canada, but it would with any announcement of a reduction in opening expenses and reduced capital spending (both measures bolster near-term free cash flow). But will Target investors in 2022 wish they would have stayed the course in Canada? We think so. The board is focused on the near-term, and this may hurt long-term performance. Caveat emptor. • Target scores fairly well on our business quality matrix. The firm has put up solid economic returns for shareholders during the past few years with relatively low volatility in its operating results. Return on invested capital (excluding goodwill) has averaged 9.9% during the past three years. Its foray into Canada destroyed billions in shareholder capital, however. It will get nothing out of it, but a black eye. Investment Highlights • Target scores fairly well on our business quality matrix. The firm has put up solid economic returns for shareholders during the past few years with relatively low volatility in its operating results. Return on invested capital (excluding goodwill) has averaged 9.9% during the past three years. Its foray into Canada destroyed billions in shareholder capital, however. It will get nothing out of it, but a black eye. • For those that don't know the firm, Target sells everyday essentials and fashionable, differentiated items at discounted prices. Approximately one third of total sales are related to its owned (Archer Farms, Circo, etc.) and exclusive brands (Fieldcrest, Nick & Nora, etc.). Target's future growth prospects have come into question as of late. If it can't expand into Canada, which is practically the United States of the north, where else will it go? This is a pretty serious question for long-term investors. • Target's cash flow generation and financial leverage are at decent levels, in our opinion. The firm's free cash flow margin and debt-to-EBITDA metrics are about what we'd expect from an average firm in our coverage universe. The company's decision to exit Canada will reduce spending, bolstering free cash in the near term, the primary determinant of intrinsic value (and that which drives stock prices). • Target is struggling with poor public perception following a well-publicized and widespread credit/debit card data breach. Though the nightmare continues for the firm, we expect a full recovery by the retailer. Its venture into Canada, however, was also an absolute blunder, and the board may have fallen asleep at the wheel. Investor confidence has been shaken.