Schafer: Target's layoffs reflect need to cut costs

The timing of Wednesday's layoffs at Target Corp. had more to do with the accounting calendar than with anything connected to the company's now-famous data breach.

There has likely been a plan to skinny down the cost structure since well before Target discovered a data breach in December, and the layoffs happened this week because the Minneapolis-based company's fiscal year always ends on the Saturday closest to Jan. 31.

That means the company wanted to get the costs associated with eliminating 475 jobs booked in a fourth quarter that was already going to be a total washout.

There is a great temptation to see any news out of Target, including the dropping of health care benefits for some part-time workers, through a lens colored by the data breach. That would not be the right way to think about any of these more recent announcements.

A decision to discontinue health benefits for part-timers was likely months in the making and reflected a growing practice among large companies with big part-time workforces.

It's also unlikely that a layoff of 475 had much to do directly with the data breach and the impact on sales and customer traffic that resulted. Target's U.S. sales growth had been sluggish and store traffic down well before the cybercrooks showed up, and the company has been signaling for months that controlling the growth of expenses is a top priority.

Last fall at Target's conference for investors and analysts, senior executives spent much of their time talking about Target's difficult expansion into Canada this fiscal year. At the end, executives rolled around to Target's long-term financial plan for earnings growth. It included keeping the U.S. retail operation's cash earnings margin healthy.

It was the analyst from the investment firm Jefferies who asked the basic follow-up question. With U.S. comparable-store sales barely growing and customer traffic down, how exactly is the company going to do that?

"Leveraging operating expenses at a 1 percent comp will be very, very difficult, make no mistake about that," responded Chief Financial Officer John Mulligan.

He went on to say that Target certainly planned to do better than grow U.S. comparable-store sales at a 1 percent pace as the economic fortunes of its traditional customers improved.

"Everyone today talked about performing and transforming," he continued, referring to his colleagues' presentations that preceded his. "A big part of transforming is hiring and building new capabilities within Target. All of that is very expense-heavy. Technology investments are expense-heavy; supply chain investments are much more expense-heavy than are investments in stores. So pulling expense out from other parts of the business is critically important."

In looking through any expense budget, to make the biggest difference you have to look closely at employees. Salary, bonus, 401(k) match, health insurance benefits and so on — that's where the money is.

Target said next to nothing on Wednesday, only that 475 positions had been eliminated worldwide because the company "continually assesses our operating model to ensure we are well-positioned to adapt to changing business needs."

That's a curious way to characterize a move to save expense dollars, pretty much the only reason big layoffs ever occur.

Chatter about layoffs at Target headquarters has been in the air in the Minneapolis skyway system for months. Stories have come via e-mail of employees who were so convinced their jobs would be going that they had long since cleaned out their desks and taken pictures of their kids home.

The news this week may have come as a relief to some. On the other hand, there is no particularly good reason for thinking the worst is over.

The company appears to have entered a period, and it may last a good long while, in which making sure that any dollar that gets spent really needs to be spent. Management may say, nonsense, we've always managed expenses as tightly as possible, but anyone who's worked in a business under the kind of stress Target has been in for the past few quarters knows the subtle ways everything seems to change.

Approval of spending requests seems to take longer. Job vacancies take a little longer to fill. Conferences that used to get 20 Target attendees now have 12. A coffee stain on the carpet seems to never get cleaned.

Expense budgets that look solid in January before the fiscal year started later get pared back.

One surprising aspect of the news this week is that cutting 475 jobs at a company the size of Target doesn't really move the needle. Target spent $3.85 billion in sales, general and administrative expense in its most recent quarter. Even at $150,000 each, the annual savings would be just a fraction of that number.

What would not be surprising this year would be more layoffs at Target.

lee.schafer@startribune.com • 612-673-4302