Is Target a Leveraged Buyout Candidate? + Comcast Cuts the Cord

25:38I'm pretty sure we called it the tale of two retailers. We've seen this before. Target slumping and Walmart doing really, really well. So what are your reactions to the fact that we're sort of in a deja vu position in third quarter 2024? So let me start off by saying I love Target. I go to the Super Target in Boca Raton, and I think they do a great job. I have not worked with senior management at Target. Actually, I had some interaction with the CMO there, but at one point I had a decent amount of interaction with everyone, including the board and the CEO at Walmart, and it's an exceptionally well-run company.

26:13And what was interesting about this is that they are going after Target's white meat. And that is Target was always a cooler, hipper, better merchandise, more aspirational version of Walmart. That you can have value, but you can have a little bit of, judge, a little bit of sizzle, a little bit of salsa on that chip, if you will. And they had their own brands, kind of a better branding campaign. It was a positioning that worked really well. But Walmart's coming for their core. I mean, really coming for their heart and their lungs. And that is the point of differentiation that a lot of wealthy people who wanted value shopped a target.

26:52Now they're just going straight to Walmart. Automation played a big role here. Walmart is now automating two times their fulfillment center volume year on year while targets is only 25 % more automated. So Walmart has the capital and the vision to make huge investments in digital. Some of them didn't pay off. I think they overpaid for Jet and they bought Bonobos, which was a stupid acquisition. Nice guys, but it was just like a cute little concept that they – anyway, so those guys got incredibly lucky in my view. But about 75 % of Walmart's increase in market share this quarter came from households earning over$100 ,000, which is the demographic typically associated with people shopping at Target.

27:32So people want convenience and affordability. Walmart, you know, the unlimited deliveries for$12.95 a month. And people are, you know, focused on spending smart. Groceries were 60 % of Walmart's U.S. sales, while the category accounts for less than 25 % of Target's sales. And I would imagine that groceries is a, while a low margin business, it's a more consistent business. And if you look at the two companies, Walmart's trading at 36 times earnings. Target is trading at 12. And the analogy here that you brought up, which is a really interesting one, is the analogy between a dominant number one and a very distant two, and that is Uber and Lyft.

28:14And they're eerily similar. Uber's up 157 % over the last five years, while Lyft is down 62%. Actually, I think both have outstanding CEOs. Dara Kassoshai and the CEO at Lyft are both impressive people. By comparison, similarly, if you will, Walmart's up 120 % over the last five years, while Target is down about 4%. So this is what I think is going to happen, and I'll come back to this. I think Target's beginning to look like a juicy LBO target, or at a minimum, they're going to have an activist in there. This thing is now cheap enough. It still has a strong brand and a great, great real estate.

28:50I think if I were to try and speculate what the problem is, it's the following. When you're dealing with a CPG company or a retailer in a duopoly, Coke, Pepsi, everyone's compensation, mojo, DNA is focused on one thing, and that is share. You do not give. If you're Pepsi, you do not, and you've got 17.8 % share. If it goes to 17.6 % as the brand manager, you might get fired. So you become so obsessed with share that in the market also is very focused on your share that you can't make the hard decisions that I think you need to make. And I would argue that Target just needs to be a dramatically smaller company that's more profitable.

29:31They have 1 ,900 stores. It should probably be 1 ,000 or 1 ,200 and cut costs and make this a more profitable, smaller business. And I think that would best be done outside of the scrutiny of a publicly traded company. And when you look at the fact that PE firms have a quarter of a trillion dollars on their balance sheet ready to deploy, when you look at the fact this thing is getting pretty cheap, one or two things is going to happen. We're either going to see an activist or we're going to see a potential club deal and take private here. Very interesting. So Target's market cap is$56 billion.

30:05Its enterprise value is around$72 billion if you account for the debt. Who's got that money? Oh, it would have to be a club deal. But you got it. Like I said, P.E. has$250 billion in dry capital and they could finance a lot of it with debt. It's still, you know, if it's trading at a P.E. of 12, that means it's got five billion in earnings. So they could probably borrow, you know, 10 to 20 billion of it and they get a club deal, get a bunch of the biggest players to each come up with 10 billion. Yeah, they could get this deal done. But I think what you're going to have in, I mean, the three biggest deals, I think, in LBO history were HCA, RGR, but none of them have happened in the last several years.

30:49But all the moons are lining up for what I think will be probably the biggest LBO in history in 2025. I think it's either going to be Intel or this company, Target. People say they know Walmart's bigger, but oftentimes people will mention Target in the same breath as Walmart. Absolutely. Target has a$56 billion market cap. Walmart's is$700 billion. It's crazy. I can tell you a lot of PE guys are sharpening their pencils and looking at this thing and they're calling their buddies and saying, if the CEO is down with this and we think we can make this happen, are you in for$1,$5,$10 billion in equity?

31:24Talking to banks, how much could we finance on this thing? There's a lot of people, I would imagine a lot of very smart people looking at this company right now. I would like to just focus on Target and the earnings themselves. And then we'll compare it to Walmart. But just to highlight what happened to Target. So revenue rose just 1%, which is way below expectations. Profits fell 12%, also way below expectations. And they said, Target, that there were two main issues they were dealing with. The first issue was the Longshoremen strike, which we've discussed before. There were all these strikes at many of our largest ports in America back in October.

32:05And that was a problem. And Target said that as a result, their freight costs and their supply chain costs were a lot higher. The second issue that they highlighted was consumer demand. So the average ticket size for Target customers was down 2%. They also saw a decline, a pretty significant decline, in their discretionary spending. And the way Togger positioned that problem is that there is this macro issue in America happening among consumers. Consumers in America are tight on cash, and so they're just more cautious about spending right now. Okay, now let's compare that to Walmart. Sales rose more than 5%.

32:46Profits higher than expected. Average ticket size grew more than 2%. And so the story over at Walmart that they are telling shareholders, and mind you, these earnings calls happen in the same week. So we're looking at what happened to Target and then immediately following that with what happened to Walmart. The story is that customers are going to Walmart more frequently, and when they do, they're also spending more. So this macro boogeyman that Target seems to be talking about when it comes to consumer demand that is supposedly hurting Target, for whatever reason, it isn't touching Walmart. Walmart's doing just fine.

33:24And then, you know, the Longshoremen strike. Walmart is the second largest importer of the affected ports from that strike. The only one ahead of it is LG Electronics. It should have been hit way harder by this strike than Target. But Walmart said that, yes, it was a slight issue, but they managed the inventory well. They only saw a 0.6 % decline in their inventory level. So, in other words, Walmart just figured it out. The consumer issue wasn't a problem, and neither was the longshoreman strike. So, this, again, is a story we've told before. This is the fourth straight quarter in which Target has blamed their underperformance on something else, whether it's inflation or demand or strikes, or in some cases, even shoplifting.

34:09And meanwhile, Walmart is overperforming. They're doing just fine. So I think the question you have to ask Target now is, at what point will you publicly recognize that maybe this is your fault? Maybe this isn't America and the consumer's doing something wrong. Maybe this is you doing something wrong, and maybe you need a drastic change. Because Wall Street just isn't buying this narrative anymore. There's a reason the stock dropped more than 20%. They're just done with it. So I guess my question to you would be, what does the boardroom do now? I think the activist point was a good one. It seems like I'm sure a lot of activists are coming in here and looking to shake things up.

34:54But what do you think the conversations in the boardroom of Target are looking like right now? What is probably going to happen and what the board should do is simple. They should fire the CEO. And that is your analysis is correct. At some point, it's about you, boss. All the problems you're claiming that are these macro systemic issues, Walmart seems to have figured out. So it's simple here. Doug McMillan gets a raise and Brian Cornell gets fired. He's been the CEO for the last 10 years. This company has underperformed dramatically. It's a peer group. And maybe it's not his fault, but at a minimum, they need a fresh change.

35:34And the way I look with CEOs, people say, fire him. CEOs make so much fucking money, they should be held to a higher standard. Yeah, he's fine. And this is what's going to happen. The chairman of the board, I would bet in the next couple weeks. Really? Okay. Well, I get the timing wrong. This guy's on the green mile. He just is. gets a call from the chairman and says, Brian, yeah, you know, love you, but we're going to make a change. And they're going to give him a golden parachute or they'll give him, they'll Ford Vesta's options. But no, he should be, this is an easy one. He is, in my opinion, after 10 years of really mediocre performance, he absolutely deserves to be terminated in my view or let go.

36:17And I'd be shocked if that didn't happen. And if it doesn't happen, that'll be the first thing on an activist PowerPoint deck is that management has vastly underperformed. He hasn't, I want to be clear, he hasn't been a disaster, but these jobs are fairly kind of what have you done for me lately? And the last five years have not been strong. Absolutely. Let's just take one moment before we wrap it up here to talk about what Walmart has done right. Because, I mean, the stock is up 120 % in the past five years. And I feel like no one saw that coming. Like, Walmart has generally been viewed as kind of a dinosaur, and more importantly, a shitty competitor to Amazon.

36:59I mean, I think the story that most people believe was that Amazon was going to kick the shit out of Walmart. But they've done really, really well. I think the question is, you know, what have they gotten right specifically? And just two things really jump out to me that are worth highlighting. The first is how they invested in e-com. So they made a more than$7 billion investment in 2022 to just revitalize all of their technological infrastructure. And the business is, the e-commerce business is tearing. It's up 27 % year over year. And you compare that to Target, which is up just 10%. And you mentioned the fact that they have doubled their automated fulfillment volume.

37:38I think that's really important. So one part of this is their embrace of technology, their embrace of the internet, which has really paid off. The second one is pricing. I don't know if you remember, but earlier this year, Walmart came out with massive discounts when inflation was ripping. And our response was, one, we commended Walmart, and two, everyone's going to follow suit now. And that is exactly what happened. Target eventually decided to follow up and they offered their own discounts. But it looks like it was too late. And you almost have to give credit to Walmart for being so bold on pricing and recognizing that the most important thing is the foot traffic and the trust of their customers.

38:22And so they said, fuck it, we're going to reduce prices before anyone else does. And it seems to have really paid off in this quarter at least. So those are my two standouts in terms of Walmart's performance. Perhaps you have some other observations on what they've done well. So this guy Bruce Buchanan, an economist at Stern, taught me a framework that has just kind of changed the way I look at shareholder value. And that is all shareholder value comes down to the relationship or the geometry between three lines. The top line is perceived value. The middle line is the price you charge. And the bottom line is the cost.

38:57And there's only two ways to create shareholder value. You either increase perceived value, better merchandising, better branding, association of innovation, and then if perceived value goes up, you can have a lot of fun. You can either raise the price you're charging, which creates greater margins because the delta between your costs and the price go up, or you can leave the price the same and you should expand market share because the delta between the price you're charging and the perceived value goes up, increasing the value to the consumer and your market share goes up. Now, the majority of shareholder value, I would argue, is around pushing the top line, the perceived value up, right?

39:34A great spokesperson, Tiger Williams, or a great ad campaign, or we are the best, you know, we're tightly associated with this brave new future of AI, so we get a ton of traffic, open AI, and we can raise our prices. What Walmart has done is they brought in this gestalt that every day we're trying to push down the cost line. And then immediately, as soon as we're able to pull it down, we pull down the price line that we charge consumers. We pass on those cost savings to the consumer immediately, thereby increasing the delta between our prices and our perceived value, which should expand share, which is exactly what happened here.

40:12And the problem is, I've always told kids coming out of business school, you want to have a bias towards a company doing this, increasing perceived value. Because when you're in the business of pushing down the line, it's purely a business of operations and scale. Doug McMillan can make multibillion-dollar investments in technology that may or may not pay off to try and get cost down 10 bips. He can make staggering investments. You see the same dynamic at Uber and Lyft. The number one player has the scale where they can just make more bets. And in this instance, when you're in the business of pushing the line down, whether you're Dell, whether you're Home Depot, whether you're Walmart, it's a business of scale and operations.

40:55And right now, both of those things go to the market leader. And the number two, quite frankly, is just feeling the pain of how much it hurts, you know, one-fifteenth of the market cap to be the number two. We'll be right back after the break with a look at Comcast's spinoff. If you're enjoying the show so far, hit follow and leave us a review on Prof G Markets.

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42:59We're back with Profit Markets. It's official.

43:27So, Scott, you predicted this. This is a clip from September of 2023. Let's play it. There needs to be recognition that cable TV assets are no longer teenagers that are going to keep growing, that they're in fact, you know, Nana and Pop-Pop and need to be made comfortable. These things are dying and they need to be managed for cash flow, not starved of investment, but stop the hallucination that these things are ever going to reignite growth again. So my prediction is you're going to see one or more players shed their assets into a different hold code to clean up their story and also for consolidation and scale.

44:07There needs to be a bunch of these things wrapped together. So there's one sales rep in Czechoslovakia selling ads on the Cartoon Network or what have you and unmuck or, you know, unfuck the story that is media companies now that have growth but also have declining assets in the same portfolio. I just want to say, I can feel you smiling on the other side of the screen. Ed, let's be honest, I'm touching my nipples. This is the most turned on I have been. I mean, granted, I don't own a single fucking coin, and I keep waiting for NVIDIA to go back to$10 a share, but let's be honest, the dog is howling on this one.

44:52The dog is howling. Yeah, this was obvious. And effectively what you have is when you mismatch families of different generations under one stock ticker, you have good assets that are growing in the market values as growth or as consumers not on cash flow. And then you have shitty businesses that are declining but still produce cash flow. Investors in the market don't know what to do. So what they do is they find the shittiest assets trading at the lowest multiple and they assign that entire multiple to the whole thing. So the divestiture of assets in different sort of stages of the life cycle here creates more clarity and ultimately creates a whole that's greater than the sum of its parts.

45:35So the disposition or clarity around a brand architecture that spins these low-performing or declining but high-cashful assets into a separate company is a very good idea. And then they will have their own currency to go buy ABC or Bravo 5 or CNN because everyone, whether it's Iger or Zaslav, is in the same position. And that is they have some amazing assets that would be valued at X and they have other assets that are valued at 0.3X. So the market assigns that 0.3 to their entire portfolio. This is a good move. it will be used potentially as a shell company to go and acquire other declining but high cash flow assets.

46:15And I remind people that the second best investment I ever made was in a Yellow Pages company. And it was very simple. We knew these things were going away. They were declining at 7 to 12 percent a year. But there's still a lot of people that want that big fat fucking book delivered to their home in rural wherever in case they need a plumber and they still have a dial-up phone. And these businesses still spun a lot of cash flow. And what we would do is go buy the biggest Yellow Pages company in the Southeast and say, okay, you're fucked, we're fucked, let's be fucked together. And the way we'll do this is we'll take your 10 % of your best sales people, we're going to lay off your entire administrative staff, we're going to close your headquarters down.

46:59And as long as we can cut costs faster, then the revenue declines based on consolidation and the fact we can pick these assets up on the cheap, every year this company increased its cash flow. And this specific company then took a lot of that cash flow and started trying to transition to a CRM software company and actually did it quite well. But consolidation of mature or declining assets can be a great business because typically these businesses don't go away as quickly as you think they're going to. And as long as you take sort of a private equity cost-cutting approach and stop trying to inject Botox and filler into this thing such that under the illusion it's going to look young again, it's not going to.

47:42So just on your point about depressed valuation, so if we look at how much revenue these assets actually generated for Comcast, it comes out to around$7 billion. Now, we don't know what the profitability is exactly. I think we can assume it is quite profitable. But there are public companies out there that are quite similar to this business. And the example we could use is Fox Corporation, which has a price to sales multiple of one and a half. So if we were to apply the same multiple, this segment is probably worth$10.5 billion. And you compare that to the overall market cap of Comcast, which is more than$160 billion.

48:19So Wall Street hates cable in the same way that they hated Yellow Pages. My question to you, though, from an investing perspective, you said that Yellow Pages was one of your best investments. What made it so good? Did you sell your stake at some point at a higher price? Or was it the fact that cash flows were high and you were receiving direct income? What made it such a good investment? So I invested in the company probably the better part of 10 years ago. And you could, for a dollar in cash flow, you had to spend two and a half dollars on a company. And so we knew these companies were going out of business, but they weren't going out of business in 30 months.

49:05So within three years, the company just in cash flow could return all of the initial investment to the investors. Wow. And this is what it comes right down to. It's very similar. Everything replicates nature or human interaction. And that is, if you have the chance, I'm going to F1 because I want to hang out with hot young people or hot successful people. I am not going to, I don't know, the Golden Girls reunion. I don't want to hang out with old people. And we are attracted to youth and vigor and growth. And so these young, vigorous, growing companies get an enormous multiple because we all want to hang out with them, right?

49:45So they trade a much higher multiples. And if you look at the most successful businesses in terms of likelihood of success from startup, the average is 14%. Only one out of seven companies survives. But 90 plus percent is senior care homes. If you're willing to go into the business of taking care of seniors, nine out of 10 of these businesses work. But there's an absence of capital because they're not as fun or sexy. They're not growing. People don't like to be around old people. It's the same with distressed assets. Everybody wants to hang out with open AI. Everybody wants to hang out with NVIDIA.

50:21They don't want to be in distressed assets. So if you go up and down the stack from angel to venture to IPOs to growth to mature to declining to distressed, hands down, the most successful, greatest likelihood of success I found in the stack, in terms of a capital or an asset around the lifestyle, it's distressed. Because you can pick up shit at pennies on the dollar. I guess it's interesting to me. I mean, I consider, I think that I think like a value investor. I think I'm a value investor. And I guess the thing that I've always felt with distressed assets is it feels as though what you have to do is you're getting a really good price and you're buying at a really good price.

51:04But then what do you do with it? You're sitting with this pile of shit that you could make look a little bit less like a pile of shit. And my assumption has always been, okay, well, you just got to flip it at some point. But what's interesting about what you described with the other pages is actually it was a good long-term investment because of how profitable it was. And because you could use those profits to then revitalize the company and turn it into a CRM, which is far more sustainable over the long term than what it was before. And so I want to continue with this yellow pages analogy because I think it's a good one.

51:39What do you think the makeover looks like for MSNBC and CNBC and SyFy and all of these channels? What does the CRMification of this spinco, how will that play out, do you think? I don't have a vision for a new business that they could pour their cash flow into to pivot this company. And also, you don't need to do that. Because these companies, there's just going to be a lot of people watching CNBC and Andrew Ross Sorkin, who is an extraordinary journalist, and Joe Kiernan, who is not. They are going to be watching these things for a long time. And there's still going to be advertisers that want to reach people who are 70, right?

52:24Average age of an MSNBC viewer. The conversations, and I know this firsthand, happening with all of these anchors is the following. Chris Wallace, we love you. You're iconic. You're fantastic. Last year, we, you know, when we were trying to convince ourselves we could inject Botox and filler into our face. and we had this idea for CNN Plus and we wanted to take you from Fox, we offered you a four or five year deal at eight million a year. That's what I've read. I would bet they said, we love you, you're great. We're willing to pay you a million bucks a year. The salary cuts, the cost cutting. We did an analysis of how many people we need at this podcast.

53:06We're getting like triple or quadruple the number of viewers per person than these big firms. These firms, all roads lead to the same place. The anchors here are pilots for Pan Am in the 70s. They're banging stewardesses. They're high prestige, but they know the writing's on the wall. They're going to be making$68 ,000 working for Spirit Airlines going from Louisiana to Asheville pretty soon. Even if they don't find another thing, these companies, as long as they keep acquiring and consolidating and cutting costs, which they will do, They will figure out a way to return all of that capital to shareholders really quickly because the share price will be low to buy in and they'll make really good money.

53:48I would actually rather I think I'd rather invest in this spin co than in the core Comcast because it'll be at a lower valuation. There's a lot of properties. Hey, Bob, are you ready to finally sell your shit to us? We'll take it. We'll take it off your hands. We'll pay you an awful price, but your stock price will go up. because the market will be focused on your parks and on Disney +, which are great businesses, instead of constantly asking you about ESPN and ABC and you having to apologize for it every three months. I love it. Let's put a consortium together, take a majority stake, and let's call it...

54:24Dogco. Let's call it Dogco. Dogco. Let's take a look at the week ahead. We'll see earnings from Dell, CrowdStrike, and HP, and we'll also see the Personal Consumption Expenditures Index for October. Sounds like a fascinating week. Scott, any predictions? The biggest LBO in history is going to happen in 2025. And there's a ton of capital on the sidelines. Some stuff is getting cheap. Great iconic companies is getting cheap. And my bets, two of my favorite candidates are now Intel and Target. And just before we go, we'll be recording an Ask Me Anything episode at the end of the year. So please send in your questions for me and Scott to officehours at profgmedia.com.

55:05or you can tag us on social media at ProfGPod or you can leave us a comment on our YouTube channel. Anything is fair game. Send us your questions. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Mia Silverio is our research lead. Jessica Lange is our research associate. Drew Burrows is our technical director and Catherine Dillon is our executive producer. Thank you for listening to ProfG Markets from the Vox Media Podcast Network. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday.

56:17And I think what's happened with Target... Hold on. Yeah. Hello. Hola. Hola. Por favor, ven detrás en una hora, por favor. Okay. Gracias. Oh, a little cosmopolitan skill from El Pato. That's right. That's right. Anyways, okay. Where were we? Otage.