I am an avid reader of Jim Welsh’s Micro Tides Newsletter. The reason why I like him is because of his macroeconomic visions and macro investing capabilities. This month Jim joined Forward Management, LLC, and I think this move will help the firm with investing decisions based on macro events.
Target
All eyes on the online channel
Target has started a series of modifications in its business model that suggest that the company is taking a more competitive approach towards Amazon. Currently, E-commerce represents only 2% of the company’s total sales. But the fact that its online channel witnessed robust growth in 2012 with a significant increase in shopper satisfaction scores indicates that we can expect 2013 to be a successful year. This is further driven by improvements in the website functionality, along with SKU (store keeping unit) expansion, which includes launching six new brands that will be sold online only.
Target is finally embracing a multi-channel retail model, including designer labels, and more effectively integrating its online and store assortment. This strategy includes an online preview before actual sale and special discounts. To support this strategy Target is forcing its vendors to be consistent in their pricing across channels. The potential of this strategy can be derived from Target’s history of building solid private labels, which represent over a third of their sales.
The multi-channel retail model also includes special leverage to its Red Card members with free shipping. Red Card sales have shown no signs of deceleration (membership has grown from 5.6% in Q4’10 to 14% in Q3’12) since its implementation in October 2010. There are multiple benefits of the card for Target, including loyalty (driving 50%+ sales increase in Red Card member sales) and the ability to track consumer shopping patterns. I estimate the Red Card to contribute $13.7 billion in sales for 2013. My confidence in this stock is further confirmed with the announcement of Red Card availability in Canada, where Target plans to open 124 stores in 2013.
I thin, in the long run investors will realize solid gains from: 1) Target’s improved focus on the online channel, which will drive the overall sales, and 2) Red Card discount program benefiting from the Canadian expansion.
Precision Castparts
The acquisition of Timet should provide overall operational ease with scrap reduction, streamlined internal supply of materials, and drawing down an abundance of inventory. Externally, Timet provides Precision with opportunities to capture all the titanium chips that were previously sold in the open market. Furthermore, the company believes there is significant hidden capacity in Timet that is yet to be utilized. In fact, this hidden capacity has been a hallmark feature of all of Precision’s most successful acquisitions. The company expects synergies of $30-$40 million over 12-16 months and $80-$100 million in synergies over the next 24-36 months.
