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hey so my name is gavin baker i'm the

chief investment officer at atreides

management

i would like to thank the zone hearts of

mind

foundation in australia for having me

here

atreides is a 1.2 billion crossover fund

that invests in both public equities and

venture and growth equity opportunities

across consumer and tech

i've been investing in e-commerce for

nearly 20 years

i've looked at probably 100 nearly 100

different

e-commerce and dtc startups from a

venture perspective and what i'm going

to do today

is look at one of the world's most

dominant

e-commerce franchises which is a public

equity

through the lens of a venture capitalist

so here are some disclosures that you

can read at your leisure

the company i have in a pitch is among

the fastest growing e-commerce companies

in north america

forget amazon you know growing 70

percent in north america

in the second quarter this company grew

faster than etsy

that's eager 137 it grew faster than

pelotons 172

this company grew 194 percent year over

year in their july quarter

and they did it at significant scale uh

second quarter july 2020 annualized

earnings

were 15.6 billion dollars

if we map this company on an s-curve

against

amazon they are following

almost exactly that same trajectory

that amazon followed from roughly 350

million dollars in quarterly revenue to

roughly 4 billion

that's a great s-curve to be on amazon

went on to

24 x total revenue from that point

we're not forecasting that but the great

thing is you're not paying for that

either

because this company is profitable and

currently trades

at 15 times their fy23

earnings

the company that i am pitching is target

and i'm pitching it through the lens of

a venture capitalist

target is in an incredible position

today

it was really two decisions that they

made the first

was to not build a separate distribution

system for e-commerce

but to really leverage their stores and

that is looking like a brilliant

decision

second they've been investing in it

and delivery technologies for years

to really bring the e-commerce and store

experiences together

and actually just finalized a lot of

those it projects right before covet hit

which was good timing

uh you can see here target has one app

that you can use to

shop in shop at the store and pick up in

the store drive up

have it delivered to you whatever you

want is a consumer

you can choose and we believe

that consensus forward estimates are

materially too low

the target's digital revenue should grow

much faster

and much more profitably than consensus

expects

over the next three four five years

target just beat in their july fy 21

which is

calendar 2020 they beat the consensus

earnings estimate by more than one

hundred percent that's that blue bar

they are in three dollars roughly three

dollars and forty cents

um consensus does not believe

that this level of earnings power is

anywhere near sustainable

consensus believes that actually the

july 2020 quarter

is going to be target's best quarter

ever i think this is highly unlikely

these are the the gray bars for forward

consensus estimates

this strongly embeds a belief that

target is not

going to be able to retain all of the

customers they acquired

during the first half of calendar 2020

which is their fiscal 21.

i can just tell you having looked at

customer cohort data

for nearly 100 e-commerce companies and

dtc startups over the last 20 years

that i think this is extremely unlikely

20 years of ecommerce history

tells us really one thing

authoritatively

once you get someone's name their email

address

their mailing address a credit card they

stored an account

uh you have their email address they

save that

you know that account name and password

and chrome or safari

or better yet in an app that they can

unlock with face id and they make two or

more purchases

the odds that they continue to repeat

are

overwhelming so consensus

embeds a belief that is completely at

odds with 20 years of e-commerce history

and let's see if it's right so far

so we use credit card data to

look at targets monthly cohorts and see

how the newly acquired 2020 cohorts

are performing target told us

on the second quarter earnings call that

there was an extremely

high repeat rate amongst their newly

acquired customers

and credit card data tells us this is

continuing

cohort analysis is absolute ground truth

for e-commerce due diligence and

investing from the venture side

we have very precise cohort data working

with third-party credit card data it's

not as precise

but you can still still see that their

new customer cohorts in 2020 are landing

larger

and expanding faster consistently

and this is continued through september

2020.

so so far the expectations embedded in

consensus

are wrong there's also been a very

significant change in their top of

funnel momentum

this is traffic to target.com compared

to amazon.com target is the blue bars

you can see in january and february

traffic to target.com was growing was

actually declining in january

growing slower than amazon in february

and it really changed

march april may and even here in

september

they're growing more than twice as fast

as amazon from a top of funnel

perspective

that's powerful

there is a strange belief in the world

that stores are not valuable

and the future is going to be e-commerce

only

i find this deeply strange because the

world's largest

and most sophisticated e-commerce

companies do not share this belief

jd alibaba and amazon are all

opening stores lots of stores in lots of

different formats

the reason they are doing this is they

all believe

maybe they're wrong but they all believe

that the future is omnichannel

and that they need stores for a variety

of reasons

i think that they are right the actual

single largest day of dollar turnover in

my career

uh in a prior life was the day that

amazon bought whole foods

i had begun hearing from probably as

early as 2014 you know warby parker open

stores in 2012

that stores were incredibly valuable for

e-commerce companies

seeing amazon make their largest

acquisition ever buy whole foods to me

was a tremendous validation of the value

of physical real estate

and yet um your average physical

retailer in america was down five to 15

percent that day on what to me was the

deeply silly idea that this was going to

make amazon more competitive

with you know companies like home depot

you know it's not like amazon bought

whole foods to

put power tools in whole foods or

clothing and whole foods

so after being structurally underweight

physical retail

for many years because i believe the

future is e-commerce

i bought an immense amount of physical

retailers that day

stores are valuable

they create better unit economics

not just across all channels they create

better

online only unit economics the most

important ratio to look at

for an e-commerce company is ltv to cac

lifetime value

of a customer to customer acquisition

costs the cost to acquire that customer

the higher that ratio the better

lots of e-commerce companies have found

the best way to lower their cap

to increase their online marketing

efficiency

is to have stores consumers trust brands

that they have seen in the physical

world

more than brands they have not stores

are also

ideally located to serve as low-cost

same-day delivery hubs

and they enable new omni-channel

experiences

at the end of the day the cheapest

same-day delivery option

will actually be click and collect where

the consumer places an order online

drives to a store and either picks it up

via drive up experience

or picks it up by walking into the store

that is even cheaper than having a drone

delivery package

and omni channel we can see it in the in

the target numbers

giving consumers choice leads to more

spending

targets omni channel customers spend

four times as much as a store only guest

and 10 times as much as a digital only

guest

and what's actually fascinating about

this chart on the right

is that in many ways younger consumers

value stores more

so this the the kind of the light blue

on the left

is speed then purple's convenience

uh black is the in-store experience and

then the grayest price

gen z values the low prices at stores

more than baby boomers which makes sense

because

baby boomers have more disposable income

but i just think it's interesting

that the younger generations value

the speed convenience experience and

prices associated with in-store shopping

more than baby boomers so demographics

are not

at all working against stores

importantly they also increase the

lifetime value of customers

by improving delivery economics in the

cheapest

same-day experience as a it's an

e-commerce experience a digital

experience as a consumer

shopping online creating a basket and

then driving themselves to pick

pick up their basket at the store and

you can see this

these are targets indexed delivery costs

per unit

when they ship it from a distribution

center

index is to a hundred when they ship it

from a store it's

40 cheaper than shipping

from from a distribution center when a

customer effectively pays for

the delivery themselves via click click

and collect experience like

um pick up in store or drive up it is 90

cheaper

and targets network of nearly 1900

stores are ideally located for these

omni channel click and collect

experiences

it takes 18 to 240 days to form a new

habit

for a lot of research and i think that

these experiences have become a habit

for many of targets consumers what

really blew my mind in the second

quarter

was seeing their drive up revenue this

is when somebody

um shops online creates a basket

checks out they drive to the store they

pull up to a designated parking spot

that has this big red drive up side that

you see

in the picture a target associate

confirms their identity

and then puts the order in their trunk

those revenues drive up revenues grew

734 percent year-over-year

and what's was shocking to me the nps

score for a relatively new fairly

unoptimized experience was over 80.

consumers love this amazon is a

world-class company

their nps score is 62.

after a customer tries drive up for the

first time they spend

30 percent more at target roughly

and because of this shift away from

shipping from distribution centers

towards shipping from stores

and quick and collect experiences

targets

unit costs for digital fulfillment

declined

30 year-over-year in the second quarter

even has their

digital revenues nearly tripled that is

incredibly

powerful math

targets nearly 1900 stores are ideally

located for same day delivery

if you're going to have a network of

same-day delivery

small little mini warehouses why not

make them stores

target is already where amazon and the

rest

of e-commerce wants to be from a last

mile delivery network

it is a dense network that is ideally

located

almost as importantly targets nearly

1900 stores make them an ideal partner

for a lot of digitally native brands

there are a lot of digitally native

brands and i've looked at many of them

on the venture side

who do not want to sell through amazon

because they don't want to give up their

data and they can't afford stores of

their own but they

understand that if they can have a

physical real world

presence it will lower um

their online customer acquisition cost

improve their marketing efficiency

thereby improve their unity economics

and that all important ltv to cap ratio

a lot of those brands have come to

target

and said we would like to sell through

your stores target says sure

but you can only sell through us this

gives target exclusive supply

and i think it's going to be the

foundation and they're just going to

follow the amazon playbook

they're going to develop a curated 3p

marketplace

where other brands sell through target

that's the highest margin form of

e-commerce

and i think these brands are going to be

the foundation of target's own 3p

marketplace and it's which is going to

work powerfully in concert with the

stores

they're also you know it's funny we're

looking at target's digital business

they do have this retail business where

somebody just walks into the store

and buys stuff and that's you know over

80 percent of their revenue

and their nearly 1900 stores are ideally

located to take

share from weaker retailers who haven't

invested to enable these omni-channel

experiences

and in many ways and in many cases have

gone bankrupt

um a lot of brick and mortar competitors

and very high margin categories

have gone bankrupt um target took

25 percent of the sales up for grabs

from toys r us

um went bankrupt and i think that they

could do something similar with the wave

of bankruptcies that we've seen so far

this year

that would be a big tailwind to their

core business so putting this all

together

there's kind of two ways to look at

target the first is kind of a

traditional pe framework

if we take a really conservative 11

earnings per share

number for fy23 which is by the way 25

above consensus estimates

it is still 19 below

the number that they just the annualized

number they just printed in the second

quarter of fy 21.

um 24 times that 11

gets you roughly 70 upside 24 times is a

reasonable up

multiple that's where kind of perceived

retail winners trade in america

you know the home depots of the world

are we can use a sum of the parts

digital only framework

and if we take a reasonable group of

e-commerce comps

um that solves for target should be

trading at five times digital revenue

which means you're getting eighty

percent of their revenues the eighty

percent that is pure physical retail

for free but i think both of those

frameworks

are conservative i think there is a

world where target really leans into

omnichannel and e-commerce

i think they can earn over 20 a share

in five to seven years putting 24 times

on that number

makes target a triple and it's a pretty

low

risk story in my mind

they have a dividend yield um it's at a

reasonable multiple

on consensus estimates but to get there

to get to that 20 they have to

lean in operationally strategically and

culturally to omni-channel and

e-commerce and this is critical

the reason a lot of retailers were slow

to embrace e-commerce was cultural

most powerful people at most retailers

were merchants

and the kind of the real estate

department that decided where to put

stores

because the world of physical retailer

if you have well located stores that are

stocked with the right goods at the

right prices

you're going to do well so that's why

the merchants in real estate were the

most important functions

online algorithms do the merchandising

and you have endless shelf space

and while these stores are super

important for um

omnichannel you your your online

presence is a url or an app

so for the first time ever because of

covid because of this tremendous success

they've had

i think the analytics team at target and

a lot of other retailers

is becoming as important as the

merchants as the real estate teams

and at the end of the day i believe

nothing accelerates change like success

targets having a lot of success and i

think that they are going to lean into

this

so that's it i hope you enjoyed it i'd

like to thank the zone

uh hearts of mind foundation again

um i really enjoyed this thank you

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