Updated Research Report on Target - Analyst Blog

On Apr 7, 2014, we issued an updated research report on Target Corp. TGT following the company's fourth-quarter fiscal 2013 results.

Target posted fourth-quarter adjusted earnings of $1.30 per share that fell 21.2% from $1.65 earned in the year-ago quarter. This relates to results from U.S. operations only.

The quarterly earnings including the U.S. and Canadian operations but excluding other one-time items came in at 90 cents a share, sharply down from $1.47 reported in the prior-year quarter. The Zacks Consensus Estimate was pegged at 85 cents a share.

Total revenue fell 5.3% to $21,516 million from the prior-year quarter and came short of the Zacks Consensus Estimate of $21,541 million.

Management hinted that security breach affected the quarterly performance. Last December, Target faced its worst security breach that affected nearly 70 million of its customers. The news of the breach had a profound impact on holiday sales and thereby on fourth-quarter results as well.

Further, fallout from the breach is likely to keep traffic at bay for some more time and may result in potential costs (litigation, compensation, and so on.) during the first half of fiscal 2014, thereby putting Target's revenues and margins under pressure. The company has been slapped with 80 civil lawsuits. We believe that it will take some time before effects of the breach get completely mitigated.

This has triggered sharp downward estimate revisions. The Zacks Consensus Estimate for both fiscal 2014 and 2015 fell 7.8% to $4.02 and $4.75, respectively, over the last 60 days.  

Lack of geographical diversification is another concern. Unlike its competitors such as Wal-Mart Stores Inc. WMT and Costco Wholesale Corporation COST, which have a globally diversified footprint, Target has its operations concentrated mainly in the United States. It was only last year that the company ventured into Canada.

Target's much anticipated Canadian expansion met with disappointing results as it reported an operating loss of $941 million in its first year.

However, management expects a turnaround in fiscal 2014 as the company now has a better inventory position and plans to launch marketing and merchandising initiatives to promote brand awareness and provide a vast assortment of products at competitive prices. This is likely to drive overall profitability and sales. Target is looking to expand further by launching smaller format stores like Target Express and CityTarget stores.

Target has adopted an aggressive cost reduction strategy. The company plans to reduce $1 billion in annualized costs by 2015, out of which $200 million have already been achieved in 2013. The savings is expected to improve margins, going forward.

Target now carries a Zacks Rank #3 (Hold).

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Another better-ranked retail stock worth investment is Barnes & Noble, Inc. BKS, which sports a Zacks Rank #1 (Strong Buy).