Target leadership may need a shake-up: Analyst

Target (TGT) shares jumped Wednesday morning after the company's profit surged 36% to $971 million in the third quarter, beating Wall Street's expectations. But sales fell during the quarter as consumers reduced discretionary spending.

Target CEO Brian Cornell told analysts on the earnings call, "Consumers are still bringing up pressures like higher interest rates, increased credit card debt, and reduced savings rates have left them with less discretionary income, forcing them to make trade-offs."

Aptus Capital Equity Analyst and Portfolio Manager David Wagner told Yahoo Finance Live that shrink is one of the biggest issues Target, as well as its rivals, needs to address.

"I just don't know how this stops," Wagner said. "It's been a problem the last four quarters in a row. The company is blaming their margins on increased shrink."

Click here to watch the full interview on the Yahoo Finance YouTube page or you can watch this full episode of Yahoo Finance Live here.

Video Transcript

- David, how are you looking at the threat of theft and what we've seen play out within so many of these retailers? Obviously, it's a problem across the industry. But in target's earnings, is this still shows that theft. They're still struggling with exactly the challenges, and the impact that they're seeing from it?

DAVID WAGNER: I just don't know how this stops. It's pretty binary to me or not, you know. Is theft is shrink continue to happen, or it's not continuing to happen? It's been, you know, 4/4 in a row. The company's blaming their margins on increased shrink.

And as I told you before, like that was the second largest aspect. I was really focusing on this earnings report. You know, what is the commentary around shrink? Has it plateaued?

We know they closed nine stores over the last quarter. But, you know, from the commentary from Brian Cornell on the earnings call here, it just doesn't seem like it's slowing down right now for them.

- And so, when we think about, ultimately, going forward from this point in the retail environment, what do you need to hear from Target on this earnings call that would signal to them, or to signal to investors, even, you know, even though we're seeing shares sent higher by about 14% here premarket, that would signal to investors that this is a company that not only has a handle on shrink, a handle on the grocery aisle, but also a handle on when they could start to repurchase shares too? Because that was something in the quarter that came out as well.

They didn't repurchase any stock even though they have plenty-- plenty of, kind of, fuel in, or at least, what they've communicated to the street they're willing to and anticipating to purchase.

DAVID WAGNER: Well, if they, you know, I think that should be pretty normal blocking and tackling. If they should be buying back their shares at 12.5 times earnings. I mean, that's like two standard deviations below their historical average, even if you take out the 2014 spike in the COVID spike right there.

I think, you know, Brad, it comes all down to balance top line growth. That's what the street needs to see for the long, only to get really back into this name. I mean, one of the biggest problems that they've had is they've, kind of, lost their brand recognition as the go-to retailer.

And if they can't get that back, well, one, they're not going to get their historical valuation that they've gotten, which is closer to 16 times. They could remain around that 13 to 14.5 times that they're trading right now. But if they don't get that brand recognition back,

I think that the market's going to have to see some type of signal from the board that Brian Cornell, well, he's probably got to go.

- He's got to go?

DAVID WAGNER: Yeah, yeah. Get them out of here.

- So, right now, I guess, so that's a lot to unpack. I was just-- I wanted to bring up TJX. But let's stick with what you just said about Brian there.

If we do, in fact, do you think that that's something that's going to, I guess, gain momentum here if we don't see that turnaround. And I guess, if you're already saying now he needs to go, is there someone within Target? Or who do you think should then potentially replace him?

DAVID WAGNER: I don't think it's something that should happen this quarter. I mean, obviously, blocking and tackling, you know, on the board regarding buybacks should happen. But, you know, what is the-- what is the name recognition here in the retailer space, on the brand side?

You know, for the longest decade, it's been Target. I mean, that's why they got such a valuation rerating, you know, at the earlier part of the 2010 decade. Like, you know, everywhere you read, on any type of meme, you know, go into target trying to spend $20, you come out spending basically $2,000.

But that really just hasn't been the case. They've lost some of their clientele. They've made some wrong steps from the vision of their marketing side. And if they can't get that top line growth back and make sure that, you know, consumers understand that they are the brand retailer that they were 10 years ago, I think that Brian Cornell-- he should be on the hot seat.