Analyst: Target cuts a 'tough decision that needed to be made'

Target announced this week that it will slash several thousand jobs at its Minneapolis headquarters over the next two years as part of an extensive reorganization of the company.

CEO Brian Cornell has said the company wants to expand its online operations and focus on smaller stores in urban areas. The new layoff announcement comes on the heels of more than 500 job cuts in the Twin Cities last month related to the company's retreat from Canada.

Sean Naughton, who worked with Target until 2007 and is now an analyst with investment banking firm Piper Jaffray, spoke to MPR News' Cathy Wurzer about what's behind these recent cuts.

Cathy Wurzer: Are these job cuts overdue? Target has been struggling obviously for some time, but evidently 500 jobs is not enough, is that what the headline is?

Sean Naughton: Yes is the short answer. Consumers have really been changing the way they've been interacting with retailers. It's a lot more now starting with your mobile phone and not necessarily the in-store experience.

Target has not adapted to this environment as quickly as they need to. And thus needs to make some pretty big organizational realignments, centralize some of its processes and get more efficient, while at the same time having the flexibility to add talent back to some new key areas to support the business and to grow.

Clearly, a very unfortunate situation for the employees at Target that are not part of the future strategic initiatives, but I do think it was a tough decision that needed to be made.

Wurzer: Why not close stores though?

Naughton: Most of these cuts are coming at the corporate level. The company believes that their store operation team has been getting leaner over the years and they have been getting more and more efficient. So most of the stores they do have out there in the U.S. today, they do think those are positively producing assets.

Target does review its stores every year as part of a store impairment process, they actually do close some stores. They closed about eight stores in 2014. That's a constant process, something they're always looking at. But the assets they have out there today, they do feel those are still productive.

Wurzer: It looks like the smaller store concept, as opposed to these large Targets that we've seen built in the past few years, these smaller stores ... seem to work fairly well, at least at this point, for Target?

Naughton: Target is definitely more focused on where consumers are going. We're seeing more consumers come back into more densely populated areas. Target has benefited from greenfielding out into what we'll call suburban sprawl, where new home developments were being put up. We seem to have a little bit of a reversal of that trend, so Target is really a lot more focused on putting in stores where people are, and that is in some of these more densely populated markets out there.

They're focused on what they call City Target, that's about 25 percent smaller than the typical Target store. Then they're also focused on this new test concept, Target Express, those are about half the size of those City Targets. Definitely they try to keep the same look and feel that you have at a Target, but do it in a much smaller space.

Wurzer: Aside from the job cuts now, what are some of the larger business objectives you heard about yesterday that really interest you?

Naughton: There were a lot of merchandising strategies that the company is going after. The biggest takeaway is they really want to lead with mobile and they want to be the leader in shopping anywhere at anytime, to really become a channel agnostic retailer and use mobile as their front door to Target.

In addition to that they want to focus on key categories: baby, kids, style and wellness. And a lot of those things have been ongoing and they'll continue to invest in those areas.

Then Target really wants to have more personalization inside the store and localization efforts. So those are some of the big takeaways, key strategic priorities that Target is going after.

Wurzer: Do you think it's too late for Target to really get heavily involved and out front when it comes to mobile?

Naughton: Their mobile app is pretty strong, so they do have a good offering there. But we do think that they need to do a better job of generating more sales from that channel. Given Target's size and what mobile and what we call e-commerce represents as a percentage of their total sales, that should be a higher number.

They're cutting off the growth of these larger stores and focusing on their urban areas, we really think that's an opportunity for them to continue to grow. There's plenty of opportunity for them to gain share back in this online channel.

This interview was transcribed and edited by MPR News reporter Jon Collins.