Two youthful faces sit atop the biggest retailers known to man, Wal-Mart (WMT) and Target (TGT). But one -- Target Chairman and CEO Brian Cornell -- is pulling away from Wal-Mart chief Doug McMillon in driving change.
The market has sniffed out Cornell's lead. Target's shares have dusted Wal-Mart's over the last year. In other words, investors realize they don't need to own shares in both companies and are willing to pay up to bank on Cornell over the next six months to a year.
Each executive has serious retail chops and spent most of last year cleaning up their predecessors' messes.
For Cornell, he moved decidedly to shutter Target's money-losing Canadian business and study what was ailing the retailer here in the States. After months of in-depth research, Cornell then laid out a well-articulated plan to Wall Street -- outlining such areas of sales optimization as an expanded organics section and better-situated food departments.
Yesterday, Cornell continued to emphasize his bold approach to big-box retailing in striking a $1.9 billion deal with CVS Health (CVS). Cornell knew that Target didn't do pharmacies particular well, so he moved decisively to ink a partnership that makes a world of sense.
Whereas Cornell is gaining an early reputation as a risk-taker ("scared money doesn't make no money," they often say), McMillon has undertaken a more methodical approach to transforming Wal-Mart. He's been bold in his own right, with early efforts that actually cost Wal-Mart money (hence the retailer's pressured stock price).
While Cornell has largely been announcing things that provide an instant boost to Target's operating profits and sales, McMillon has been seeking to raise Wal-Mart's pay scales and restructure departments so they're easier and more helpful to shop. He's also recommitted the big-box retailer to digital, an initiative that costs a pretty penny.
But while both well-paid executives have announced "wow" moves in their first year on the job, it's Cornell who's moving more quickly. And for that reason, I believe that smart investors should stay long on Target until McMillon's actions yield a U.S. sales reacceleration and stronger operating profits for the entire company.
I've been pounding the table in favor of Target stocks for months. Here's where Cornell is the leading the race:
I think the CVS deal is a hugely transformative one, a true win/win for both companies that will drive brand loyalty, traffic and profitable transactions.
According to a company spokesperson, a CVS Pharmacy or Minute Clinic sign will be added to the exterior of Target stores where permitted. That's a powerful marketing mechanism to passersby. If you trust CVS for your scripts but have been a loyal Wal-Mart shopper, you might just switch to Target to save a trip.
The Target spokesperson also pointed out that following the deal's close and transitional phase, the CVS ExtraCare frequent-buyer loyalty cards will be usable at all CVS pharmacies located in Target stores. You're got to love that integration. It fosters greater affinity for the Target brand -- and ever-more data they could mine to aid in future marketing and promotions.
While Target says it's not planning more deals like the CVS tie-up, I think it's opened the door for striking additional joint ventures in the future. Adding in-house shops by top vendors (in apparel, for instance) could help Target reduce labor costs while boosting the chain's cachet. If I were J.C. Penney (JCP) or Kohl's (KSS), I'd be paying more attention to Target following the CVS deal and seeing what exclusive long-term deals I could lock down for my own company.
Organic products are an increasingly important (and profitable) part of large-box retailers' operations, but Wal-Mart is moving absurdly slow in the segment. According to the company, the chain has only has 100 SKUs of organics. Wal-Mart is also just beginning to use signage to highlight organics in its produce section.
By contrast, Target's Made to Matter program is establishing partnerships with suppliers that agree to create "better-for-you" products exclusively for Target.
After piloting products in 2014 from 16 vendors (organic-food and natural-cleaning-product makers among them), Target plans to expand the program to 31 suppliers this year. The company expects sales from the collaboration to reach $1 billion in 2015 alone.
"We know that 98% of our guests purchase natural or organic products. Thus, we need to make sure we offer them the products and the selection they're looking for," Cornell said during Target's first-quarter earnings call.
I think by this year's holiday season, some of Target's top stores will look much different in terms of organics, even in relation to what they offer today. You'll see more organics on important end-caps (we're already seeing that in dog food), plus more signage and more marketing.
That emphasis could be a nice win for the company as families prepare to host holiday dinners!