Target's Positive Quarterly Results Catch Some Investors Off-Guard

On Wednesday, Target TGT reported its fourth quarter results.

Investor sentiment was generally low. After all, the company is still in crisis mode: dealing with a massive data breach and word that its recent expansion to Canada is off to a poor start.

Target's results may have caught some investors off-guard, however, by reporting an EPS of $1.30, beating the consensus estimate of $0.82. Revenue of $21.52 billion was good for a $60 million beat. Net earnings for the quarter totaled $520 million, compared to $961 million in the same quarter last year.

Profits took a hit from the data breach, as insurance has covered $44 million of the $61 million in charges thus far. But shares surged higher by more than seven percent, as investors chose to focus on the positives.

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“Bottom Line: Breaches, traffic pressure, Canadian losses.. all seems to be going wrong at Target.. yet it trades at a Wal-Mart multiple on what are likely depressed 2014 results,” Melich wrote in a note to clients on Wednesday. With that in mind, shares trading at 13x the analysts 2015 estimates with an eventual $500 million Canadian EBITDA swing, positive comps and hope for comp accelerations moving forward, Target's risk to reward ratio is “favorable.” If Target is able to stabilize its traffic in 2014 the company will see further meaningful upside going in to 2015 especially if Target Canada remains on track to break even. Free cash flow could allow the company to resume its $3 billion share buyback program. 

Then there's Brian Sozzi, CEO & chief equities strategist at Belus Capital Advisors, who wasn't buying what Target was selling.

In a note to clients, Sozzi noted five not-so-obvious takeaways from the earnings release. Firstly, U.S. same-store sales, which declined by 2.5 percent, is under-performing its largest competitor Wal-Mart, who saw same-store sales decline by 0.4 percent. Wal-Mart is in the midst of an all-out price war being led by Wal-Mart, which is leading to Target losing market share. Secondly, a decline of 20 bps in the U.S. is “a touch more of a drop off than we have come to expect from Target,” which is party due to the company's efforts to rebuild traffic following the data breach.

Third, Canadian gross margins are “shockingly” low at 4.4 percent, compared to the U.S. at 27.6 percent. “Target Canada will be a material drag to the company's consolidated financials in 2014,” Sozzi wrote. Fourth, Target hasn't announced share repurchases in the quarter, as doing so could negatively affect its credit rating. With no final estimate on the financial damage of the data breach, Target will likely disappoint investors in 2014 with no dividend hikes and a pullback in buyback commitment.

Finally, Target's inventory rose 10.81 percent in the quarter, and looks especially poor when compared to Wal-Mart's inventories increase of 2.4 percent in the quarter. Sozzi maintains a Sell rating, and a $57 price target.