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Target (TGT)
Target Might Have a Bull's-Eye on It's Back
Business at Target has had a pretty good run over the last couple of years. While the biggest player in the field, Wal-Mart (WMT: Charts, News, Offers) has shown signs of struggling and posted anemic results, Target has been notching up impressive numbers when it comes to percentage increases in same-store sales (often doubling those of Wal-Mart). The bottom line has been solid too (e.g. net income rose a greater than expected 18% in Q1). But, its stock has been on the sluggish side, hovering around $60. That has changed over the last couple of weeks as people have speculated that some sort of deal involving Target might be in works. Those rumblings got a big boost yesterday as reports circulated that William Ackman, a prominent activist investor has taken atleast a 5% stake in the company sending the stock up close to 7%. Ackman usually likes to get involved in companies when they are struggling. By all accounts, Target doesn't fit that description, so is he just looking to make a quick buck or does he have some other ideas?
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Though things have slowed down a little bit over the last couple of months partly due to rising gas prices, most people have been impressed by Target's execution of its strategy, over the last few years, and its ability to cater to a slightly up-market, more price-insensitive customer base while managing to preserve its reputation as a discount retailer. Therefore, it is a little surprising that an activist investor such as William Ackman would get involved in Target through his hedge fund, Pershing Square, because his history is of one who likes to fix broken things (companies) or extract value if he feels that it is being wasted. For example, he is widely credited with pressuring Wendy's (WEN: Charts, News, Offers) management to spin-off its Tim Hortons Inc. coffee shop chain and with pushing McDonalds (MCD: Charts, News, Offers) to undertake a stock buyback plan of about $1 billion.
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Many analysts believe Target is being run as efficiently as possible and that management is leaving no money on the table which means there is no value to be extracted by an activist investor by agitating for change. Obviously, Ackman doesn't quiet view things the same way. So what could his plans be? He is reportedly planning to officially disclose his stake in Target next week in an SEC filing and might issue a statement outlining his vision. Speculation on his motives has mostly centered on Target's credit card business which, according to the Wall Street Journal, has an accounts receivable portfolio of $6.5 billion. Pershing Square could either be looking to buy this portfolio or persuade Target to sell it along with its credit card business. Target, has for long, steadfastly maintained that its credit card business is very profitable and it has no intentions of getting rid of it. It is also one of the few retailers which have a bank charter. Ackman probably hopes to pressure management to change its stance by hoarding up on Target's stock.
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So should Target sell the credit card portfolio? Granted, it is profitable and has been a key growth driver at the company but for how long? Credit card businesses do well when you can borrow money en masse on the cheap and then turn around and use it to finance the credit card purchases of consumers while of course, charging them a higher interest rate (than what you are paying). With cheap financing becoming more and more scarce, Target is sure to face tightening profit margins at its credit card business which is why it may make sense to divest. The other side of the argument will be that interest rates are cyclical and that Target should wait out the next few years until credit starts to become cheap again. It's also possible that Ackman and Pershing Square have some other intentions (e.g. pressuring the firm to take on greater leverage and buyback stock or sell some of the massive amounts of real estate that its stores sit on and then lease the land back). Therefore, the next couple of weeks should definitely see some very active movement in Target's stock price.
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Profile |
The Company's principal activities are to operate large, general merchandise discount stores and on-line business in the United States. As on 04-Oct-2005, the Company operated 1351 Target stores in 47 states. During 2004, the Company discontinued the operations of Mervyn's and Marshall Field's stores.
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