Target Does the Sensible Thing and Re-Ups CEO

Arguably one of the best CEOs in Target’s (TGT) 60-year history, Brian Cornell will stay at the helm of the Minneapolis-based discount retailer for another three years. 

Assuming Cornell retires at the end of fiscal 2025, he will have led Target for a decade and six months, growing the company into a formidable opponent for Walmart (WMT), which wasn’t an easy task given the state of its business when Cornell took over in July 2014.

“Since joining Target in 2014, Brian has worked to transform Target into an omnichannel leader by driving a guest-centric, purpose-driven strategy. The board is pleased that Brian has committed to continue leading Target's strategy and driving its multi-year, long-range plan alongside his talented leadership team,” said Monica Lozano, lead independent director of Target's Board of Directors.

While Target stock has lost 27% of its value year-to-date through Sep. 7, there is no mistaking the fact that the board had no option but to do away with the company’s mandatory retirement age of 65.

To do anything but extend Cornell for another three years would have been outright incompetence by a board that is compensated exceptionally well -- the 14 board members were paid between $173,000 and $335,000 over the past year -- and know better to mess with a good thing. 

Long-time shareholders have to be ecstatic that Cornell is staying to finish the job he started in 2014. If you own TGT stock or are considering buying on 2022’s dip, the latest news confirms that Target’s future is bright.

Cornell’s Contribution to Target

The press release announcing Cornell’s three-year extension stated that the CEO’s tenure has seen Target’s revenues grow by almost $40 billion. In fiscal 2013, Target’s sales were $71.3 billion. By fiscal 2021, they’d grown to $106.0 billion, a compound annual growth rate (CAGR) of 5.1%. Over the same period, Walmart’s sales increased by 2.3% annually. 

However, it is Target’s growth over the past three fiscal years where Cornell shined. Between 2019 and 2021, Target’s CAGR for revenue was 16.5%, almost a four-fold increase relative to Walmart at 4.6%. 

Even more impressive are the 2019 to 2021 gains for operating income. In 2019, Target’s operating income was $4.7 billion. Two years later, they almost doubled to $9.1 billion, a CAGR of 39.2%, a four-fold increase over Walmart. 

Since taking the helm in 2014, Brian Cornell has been awarded many awards for turning Target into a legitimate retail threat. In November 2021, the National Retail Federation named Cornell The Visionary for 2022.  

“Brian Cornell’s purpose-driven leadership and strategic vision reflect an unwavering commitment to his team, and a keen ability to cut through the noise and truly understand what American families want and need,” NRF president and CEO Matthew Shay said, announcing the award. 

Canada Had to Go

There is no question that Cornell has transformed Target’s business. 

That said, the tough decision he had to make early in his tenure defines his legacy as one of Target’s best CEOs in its 60-year history. 

In January 2015, after being in the top job for five months, Target announced that it was pulling out of Canada after losing more than $2 billion in less than two years, making it Canada’s most significant retail failure ever.

“After a thorough review of our Canadian performance and careful consideration of the implications of all options, we were unable to find a realistic scenario that would get Target Canada to profitability until at least 2021,” Cornell stated in January 2015. 

Target took a $5.4 billion writedown on its Canadian business. More importantly, 17,600 people lost their jobs due to the closure of 133 stores. 

That’s never an easy task for an incoming CEO. Unfortunately, with its U.S. business having a tough time competing with Walmart, it was the only choice to be made. 

Cornell wanted to return Target to its rightful place in discount retail. Losing the Canadian distraction was an essential first step in righting the ship.

Three More Years to Cement His Legacy

Since Target reported nearly a 90% decline in quarterly profits on Aug. 17, TGT stock has lost more than 6% of its value. That’s on top of the 21% it already lost before announcing the inventory-related drop in earnings.

However, in much the same way Cornell took aggressive actions to stem the losses from its Canadian misadventure in 2015, the CEO did the same this past quarter regarding its inventory. 

“We could have held on to excess inventory and attempted to deal with it slowly, over multiple quarters or even years. Well, that might have reduced the near-term financial impact, it would have held back our business over time,” Cornell stated in its Q2 2022 conference call. 

“Of course, this decision would have driven incremental costs to store and manage the excess inventory over a longer period. But much more importantly, it would have degraded the guest experience.”

So, Cornell ripped the band-aid off in one pull, cutting prices to unload specific categories of unwanted inventory and, in the process, lowering its gross margin by 890 basis points to 21.5%. That was just 230 basis points higher than its selling, general, and administrative expenses, compared to an 11.1 percentage point spread a year earlier. 

Shareholders can look to many positive points in the second quarter despite the inventory issue. 

For example, the company’s own brands generate annual revenue of more than $30 billion, with 12 of them generating at least $1 billion. Further, its digital comparable sales grew 9.0% in the quarter, for a two-year stack of 18.9%. 

I could go on. 

Long-time Target shareholders got an early Christmas present courtesy of Brian Cornell and the board. It’s time to take advantage of it.

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