December 21, 2014

Will Target’s New CEO Bring Holiday Cheer for Shareholders?

Target’s aggressive bid to boost profits with its earliest ever Black Friday sale – starting Thanksgiving Day – is one more signal of the retailer’s holiday wish to redeem itself this season.  And it has good reason for needing a reboot.  Target’s growth stumbled as its push into Canada fell below expectations, and its food and grocery unit continues to struggle.  Customer traffic at U.S. stores has declined over the past two years.  Meanwhile, Target recently marked the one-year anniversary of its data breach which compromised 40 million credit and debit cards.  The breach and resulting public outcry during the critical 2013 Christmas shopping period was a tipping point – Target ousted then CEO, Gregg Steinhafel, and hired outsider, Brian Cornell, to redirect the company.

Cornell’s resume is stacked with high profile retailers and consumer products companies, such as Safeway, Sam’s Club, and PepsiCo.  But will Cornell, a tried and proven retail executive, be what Target needs to recover from its recent results?  Are the terms of Cornell’s signing a good deal for shareholders?

Brian Cornell’s Track Record

Cornell has minimal experience with Target’s greatest revenue source and key differentiator among its competitors: chic and cheap apparel and home furnishings.  However, during the last decade,

he’s exhibited strong leadership capabilities.  He quickly ascended the ranks after starting as Chief Marketing Officer (CMO) at Safeway in 2004 to CEO of Pepsi Americas (subsidiary of PepsiCo) in 2012.  Apart from Michaels Stores , which suffered through recessionary turbulence, the companies at which Cornell served as an executive officer, have experienced strong performance.  Most notably, Sam’s Club (a division of Wal-Mart Stores), recorded a 29% increase in operating income over Cornell’s four-year tenure as CEO, in which he is credited with turning the tide after years of weak performance.  Similarly, Pepsi Americas achieved a 3.5% increase in operating profit while Cornell was at the helm.  Cornell’s hand in these successes bodes well for Target, whose profit plateaued last year and whose revenue declined 1% from 2012 to 2013.

From an investor perspective, Cornell has also proven himself to be a driver of shareholder value.  During his tenure at Safeway, the company’s stock price increased at an annualized rate of 16%, while his stint at PepsiCo also coincided with an annualized stock price increase of 16%.  Given this history of strong stock price performance, it’s understandable why Target’s Board of Directors believes Cornell will be the right person to right the ship.

The Right Price for a New CEO?

To our second question, even if Cornell is capable of pulling Target from its slump, are the terms of his signing a good deal for shareholders?  To keep him focused on helping Target regain market share, the company designed an attractive pay package – consisting of $12.3 million in annual total direct compensation (salary, short- and long-term incentives) – that aligns Cornell’s interests with those of shareholders.  In addition, he received $3.8 million in new hire equity awards and $19.3 million in make-whole grants, some of which was compensation for a $6 million retention equity award that PepsiCo granted to him just prior to his departure.

According to Farient’s Performance Alignment Report, the Alignment Zone highlights the acceptable range of pay given the size, industry, and performance of the company.  Historically, we find that Target’s CEO compensation has been reasonable and appropriately sensitive to performance. Since Cornell’s annual Total Direct Compensation is 14% below that of his predecessor, it appears to be reasonable as well.

Moreover, Target changed its pay mix in 2013 to grant only performance-based long-term incentives. The pay mix shifted from 50% options, 25% performance-based stock, and 25% time-based stock to 100% performance-based stock awards tied to financial metrics and relative total shareholder return (TSR) versus peers.  This shift highlights Target’s focus on tying executive performance to an increase in shareholder value.  With these two changes, shareholders appear to be getting a good deal relative to the previous pay plan.  However, it will be up to Cornell to drive corporate performance and create long-term value.

The Risk May Be Rewarding

The retail giant has taken a risk hiring its first outsider to lead the company.  Following the announcement of Cornell’s hire (effective August 12, 2014), the market reacted less than enthusiastically, driving the stock down by 6% in one week.

However, Cornell seems to understand the challenges ahead.  Shortly after coming on board, he refused to sugar-coat the situation, acknowledging that no one is pleased with Target’s current performance.  He’s since provided a window into his approach moving forward, noting that he wants Target to focus on only a half-dozen key categories—like baby products, fashion, and furniture—which can help it stand out in a sea of sameness in retail.  That shift will soon be underway.

Meanwhile, Target will be aggressive during this holiday season when it comes to driving sales and traffic – even if it’s at the expense of profits in the short term.  Plans include free shipping on all website orders in addition to the Thanksgiving Day opening.  Fourth quarter results are expected to surpass those of last year.   The stock has responded, rebounding 20% from the low set after Cornell’s announcement, a sign that investors have confidence in the strategy and future financial results.

Hitting the Target for Shareholders

Are the terms of Cornell’s hiring a good deal for shareholders?  Cornell’s decade of strong business results and shareholder returns speak volumes, and he’s wasted no time getting to work proving himself in this latest challenge.  Cornell’s pay package, with a lower target value and a stronger performance orientation, is an improvement over his predecessors as well.  Long term business performance will determine the final answer, but if early results are any indication, Cornell’s leadership will bring holiday cheer for shareholders.

This article originally appeared on Forbes.com.

Tweet
Email
Share