General merchandise retailer Target (NYSE:TGT) continues to feel the heat from the recent data breach which now is also expected to impact the financial performance in the final quarter of the year.
On top of the direct impact of the breach causing slower sales data, Target's Canadian operations are creating more headaches as well in the fourth quarter.
The 2017 targets might really come under pressure making it easy for me to stay on the sidelines.
Update On The Breach..
Target announced that the recent data breach might be worse than previously anticipated. Certain guest information, other than payment card data which has previously been communicated, has been stolen or compromised as well.
Stolen information includes names, addresses, phone numbers or e-mail addresses of up to 70 million individuals. The company apologizes for the breach, making it a top priority to address. Note that originally, Target believed data from some 40 million individuals would have been stolen.
Target furthermore announced that its clients will have zero liabilities for any costs arising from fraudulent charges being the result of the breach. The company furthermore offers a year of free credit monitoring and identity theft production to all guests in US stores.
..Which Is Hurting Financially As Well
Target announced the payment data breach on the 19th of December. Ever since, business has been down quite a bit, prompting management in lowering this quarter's outlook. The company noted that it saw an improvement in the past few days, but it is unsure how the latest news will impact shoppers going forwards.
Fourth quarter adjusted earnings are now seen between $1.20 and $1.30 per share, which implies a downwards revision of $0.30 per share. Comparable sales for the quarter are now seen down 2.5% versus a previous outlook for flat sales. For the remainder of the quarter, comparable sales are seen down anywhere between 2 and 6%.
Target is not giving a GAAP outlook for the fourth quarter yet it identified quite a few charges impacting earnings. This includes a $0.05-$0.10 per share charge related to store closures and real estimate impairments. Canadian operations, in an attempt to clear excess inventory, will lower GAAP earnings by $0.45 per share. This is much more than a previously anticipated $0.22-$0.32 per share charge.
On top of that Target could incur and take charges related to the data breach which have not been foreseen yet, making GAAP earnings substantially lower than adjusted earnings. Note that stolen data could potentially be used to produce counterfeit credit cards, creating significant potential damage.
Long Term Remains Intact
Target stresses that despite the short term headwinds the long term story remains intact. The company remains committed to its 2017 plan. In that year its troubled Canadian operations should generate $6 billion in revenues with some 150 stores. Earnings per share contribution for the year is pegged around $0.80 per share, implying earnings of around $500 million.
US store sales are expected to grow by 5% per annum till that time, boosting earnings per share to $7.20 per share. As such, the group aims to earn $8 per share three years ahead in time.
The Market Is Unmoved
Despite the news flow the stock remains surprisingly resilient. Since the initial data breach has been communicated about three weeks ago, the stock has actually risen a dollar to $63 per share.
Full year adjusted earnings for 2013 are now seen at $4.29-$4.39 per share. Given notably the troubles at the Canadian expansion, GAAP earnings are seen much lower. I forecast GAAP earnings anywhere between $2.20 and $3.00 per share. Note that I leave a wider bandwidth to reflect for potential data breach damages.
At $63 per share this results in a relative steep valuation for now, yet investors have been patient with Target based on those steep earnings predictions of $8 per share in 2017. This values operations at 8 times earnings expected three years ahead.
The $0.43 quarterly dividend which provides investors with a 2.7% dividend yield has been attractive as well. Still shares have seen a 15% retreat from last summer's highs as the Canadian expansion has been quite troublesome, to say the least.
Takeaway For Investors
I would be very cautious at these levels, especially with the latest news while the stock holds up reasonably well. Back in November, I check out Target's prospects after it released its third quarter results.
At the time shares traded around $64 as I noted that the company was starting to fall behind on its long term 2017 targets. In Friday's update, the company again revealed that things are worse than anticipated taking another $0.45 per share charge, or close to $300 million in the fourth quarter.
While the company trades at very high current multiples, the valuation is better when striping out the negative impact of Canada. Yet the impact is greater than anticipated and combined with the breach these are serious issues. Don't forget that Target operates with a sizable net debt position of $14 billion, making me quite hesitant.
Even if $8 per share is attainable, and this would warrant a $100 valuation, this leaves capital gains of just 16% on a three year annualized basis. Believing there is actually more downside than upside to this 2017 estimate, I find it rather easy to stay on the sidelines.