New CEO Gregg Steinhafel has near-term challenges but places his faith in Target's tried-and-tested teamwork.
Here on the 26th floor of Target's headquarters in downtown Minne- apolis, there's been no hoopla. No ceremonial passing of the baton. No party with juice and cookies.
But a new era has begun.
Bob Ulrich, the man who led Target through nearly two and a half decades of unprecedented growth, punched out Wednesday as CEO. On Thursday, Gregg Steinhafel officially took the helm of the nation's No. 2 discount chain.
"Bob's still right across the hall," Steinhafel joked in a rare interview this week. "We're within walking and shouting distance of each other."
Kidding aside, the 53-year-old is plenty prepared to become Target's top dog. He's been with the company for 20 years -- most of them at Ulrich's side -- and has been president since 1999.
But Steinhafel takes over at one of the most turbulent times in Target's 46-year history. Cash-strapped consumers are heading in droves to Wal-Mart, which has been pushing its low-price image. Target's stock price, now in the $54 range, is down 23 percent since last summer, and for the first time in years, several Wall Street analysts are urging investors to sell. Same-store sales just dipped below Wal-Mart's for the first time in 13 quarters. And looking over Steinhafel's shoulder, an activist investor is ready to shake things up if need be.
"It's going to be a challenge for Gregg and everyone else," said Jeff Klinefelter, retail analyst with Piper Jaffray in Minneapolis, who worked at Target in the 1990s. "At the same time, it's an opportunity to establish yourself very quickly, demonstrate your leadership and strategic-planning skills, and set out your own unique vision for Target-the-brand in this next economic cycle."
Alhough it's clear Steinhafel will bring a different personality to the post than the notoriously press-shy Ulrich, no one expects major shifts in the way the company is managed or the course it has set for growth.
"It's one of the most boring CEO transitions," said Lauri Brunner, an analyst with Thrivent Investment Management in Minneapolis. "Nobody shopping in stores is going to notice. And that's one of the best transitions you can make."
It's also just the way Target wants it. At a company known for being anything but boring, Target's storied success has been built on being measured, steady and consistent. Its strength lies in motivating employees -- "team members" in corporate lingo -- to be first to market with merchandise that's high on style and quality and low on price. Hence the familiar pitch: "Expect More. Pay Less."
The problem, Steinhafel readily admits, is that in the current economic funk, the "pay less" side of the message isn't hitting the mark. A recent Citi Investment Research survey found a stunning 87 percent of consumers surveyed believed Wal-Mart's prices are lower, even though prices on at least a third of the items are within pennies.
With wide, shiny aisles, well-lit grocery bins and flashy fashion items, Steinhafel said customers have a hard time believing that rock-bottom prices can be found within.
"It's not a new challenge for us," he said, adding that the company knows it won't win -- and doesn't try to win -- on price. "We want to make it a neutral. We don't want to make it a negative. But when you're competing against the world's largest company, virtually all of their resources focused on saving money and paying less, it would be careless of us to believe we could out-Wal-Mart Wal-Mart."
It started with paint
Steinhafel grew up in Mequon, Wis., in a family well-known for the furniture business his brothers still run.
He went to college close to home, at Carroll College in Waukesha, Wis., and went on to get his MBA from Northwestern University's Kellogg School of Management.
"I did work at a bank for two summers when I was in college," he said, with a chuckle. "That solidified my passion for retail."
Like Ulrich and many other executives, Steinhafel, is a Target lifer. He was hired as junior buyer of paints in 1979, right out of grad school, and rose quickly through merchandising ranks.
He has been a key architect of making Target's merchandise distinctive and affordable, and for designing stores that make that merchandise stand out. Steinhafel overhauled the way Target dealt with suppliers, and built up an in-house operation of international buyers.
Like all Target executives, Steinhafel always has deflected credit to the balance of the team, saying the company's success has more to do with a top-to-bottom obsession with "being fashionable, being first and delivering great value. It has nothing to do with my abilities whatsoever."
Target's sustained track record is what convinces many analysts Target can ride out the current economic woes.
"If they have a culture of evolving and understanding what consumers want, and they are out in front of that with their marketing, that culture doesn't change just because the country is approaching a recession," said Thrivent's Brunner.
The challenged consumer
Still the company seemed blindsided by the recent swift snubbing by worried shoppers. It missed its own forecasts in three of the past four months.
"This is probably the most challenging consumer climate we've faced in some time," Steinhafel said. "We have to adjust and recognize this will be here for a while. It requires us to think differently about our business model and get a lot tougher on expenses and productivity than we have in the past, because our consumers are very, very cash-strapped. They barely have enough money to cover food and the basics."
Target also is vulnerable to shaky consumer confidence, with 41 percent of its sales coming from apparel and home furnishings, two high-margin categories now taking the biggest hit. It showed in its most recent quarter, as profit fell 8.1 percent from a year earlier. While Target is pushing groceries, food earns the company much less than handbags or bedspreads.
Though well-aware of the gloom, Steinhafel remains committed to Target's current revenue-growth pace of 8 to 10 percent a year, with the company betting big on groceries. Its first food distribution center, in Lake City, Fla., is nearly complete
While retailers everywhere -- including Wal-Mart, Kohl's and Home Depot -- are scaling back expansion plans because of the weak economy, Steinhafel is sticking to the 1,613 store chain's growth plans, now averaging 100 new store openings.
Unlike Wal-Mart, which isn't building anything but Supercenters with groceries, Steinhafel said decisions to build SuperTargets or general merchandise stores will be made on a store-by-store basis.
"If this would be a prolonged, cyclical downturn, we would throttle back and adjust back slightly our store growth," Steinhafel said. "We don't see that changing in the short term. We're a growth retailer. We're going to stay on that path."
Steinhafel believes the company will go international someday, with Canada or Mexico in the not-so-distant future. But overseas expansion is likely many years out. Logistical hurdles are part of the reason. So is the lack of a widespread affluent middle class in developing markets, such as China and India.
With a domestic market in the $13.5 trillion range, based on food apparel and clothing, Steinhafel estimates Target has a 3 percent share.
"When you put it in that context, we have 97 percent left to go," he said.
Then there's Bill Ackman, the New York hedge fund operator whose Pershing Square Capital Management bought a nearly 10 percent stake in the company last summer.
With a reputation for agitating for change at companies he invests in, Ackman pushed Target to reverse its longstanding reluctance to sell its credit card receivables. Target said it is negotiating with a possible buyer (rumored to be J.P. Morgan Chase & Co.) that would pay about $4 billion for half the receivables. A sale in the second quarter "seems possible," the company has said.
But with more of Target's credit card holders not paying their bills, some analysts believe the retailer's portfolio could be losing value, putting the potential deal in jeopardy.
Ackman also may want Target to sell the real estate under its stores. Target insiders say the land ownership gives the company better control, and it's a core value that won't easily be pushed aside. Ackman said he's pleased Target took him up on picking up the pace of its stock buyback program -- which now may be the lone upside to Target's falling share price.
Ackman, whose cash investment has fallen 15 percent, said he's in it for the long haul, and, so far, has kept his cage-rattling to a minimum. He said he and Steinhafel have met a handful of times for maybe five hours total, but more face-time is sure to come.
"We believe the Target management team is the best retail operating team in the industry," Ackman said. "But we believe Target stock is undervalued and we have some ideas on how to address that. ... The challenge beyond the next 12 to 18 months is to keep Target relevant and competing the way they've competed historically."
Steinhafel said the company sees Ackman as an "important investor ... who, like all our other investors, has good ideas."
"We're open to input," Steinhafel said. "We want to understand how we can best unlock shareholder value. It's something good stewards and good leadership should naturally do."
Steinhafel has an easy way with people, who universally describe him as down-to-earth and approachable. He's described as a good listener with a knack for asking razor-sharp questions, and for hiring bright people and giving them wide latitude.
He admits to having butterflies "and a few more sleepless nights than in the past" as he moves from the second chair to the first. But he's a competitor, Target style.
"When you're going downstream with a strong economic current and the wind at your back, you're less sharp, less crisp, and you're not totally aware of all the external influences that are aiding you in your journey," he said.
"It's only when you face a tough headwind, where you really have to diagnose and fix a business, that you achieve personal as well as team growth."
Jackie Crosby • 612-673-7335