YCG Investments
“If you buy above average businesses at below average prices, on average, we believe you should come out ahead.” — Brian Yacktman

Shareholders on Target

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Today, Target shareholders shot down Bill Ackman’s proposal to nominate 5 candidates to the board, including himself. We believe they were right on target.

Target has been one of the few to succeed in battling Wal-Mart in the discount retailing space by striving to create a different shopping experience. They target a more affluent, female customer base (an estimated 75% are female) and get about 40% of sales from fashionable home decor and more stylish apparel. This is one reason they have been harder hit than Wal-Mart during this downturn, which gets 40% of sales from consumables such as groceries. Additionally, they have more exposure to credit cards and have hurt from an increase in defaults.

Ackman, founder of Pershing Square Capital Mgt., has a major stake in Target via stock and options, and as such suffered severe losses as Target stock plummeted from $70 to $25. He cited many reasons for his desire to shake up the board. He does have a point – the board owns very little stock. But we question if his proposal to separate the retail business and the real estate by placing Target into a REIT would really unlock value. First off, in order for a REIT to carry a high multiple, investors would want to see a diverse cash-flow stream coming from several different tenants. Second, Target would lose some of its flexibility in renovating and opening new stores. But kudos to Bill for his idea generation.

Now with this proxy fight off their back, they should have the ability to regain focus on their main target – a strong retail business.

Have you had enough Target puns?

Disclaimer: The specific securities identified and discussed should not be considered a recommendation to purchase or sell any particular security. Rather, this commentary is presented solely for the purpose of illustrating YCG’s investment approach. These commentaries contain our views and opinions at the time such commentaries were written and are subject to change thereafter. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. These commentaries may include “forward looking statements” which may or may not be accurate in the long-term. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable. Past performance is no guarantee of future results.

Posted by: Brian Yacktman | May 28, 2009 | Permalink

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