An investigation has revealed that the data of around 70 million citizens has been stolen from Target's (TGT) records. Data included names, addresses, phone numbers or email addresses. The company says that much of the stolen data was partial in nature and the company will try to provide information to the affected guests about tips to defend themselves against consumer scammers. Target is also extending service to monitor credit cards of the affected guests. The company also assured its guests that they will have zero liability for any type of cost of fraud that came from breach.
While Target provided updates about the expected fourth quarter 2013 financial results, the company said that it expected to be hit by the data breach incident. The company expected to face a decline in revenue of around 2.5% in the quarter compared to the prior guidance that expected flat sales. Prior guidance for EPS was $1.5 to $1.6 but this guidance was later lowered to $1.2-$1.3. The company admits that prior to the announcement of payment card data breach, the fourth quarter targets were in line with the year-to-date trend. Target said that its penetration growth is also moderated but it was still stronger than the last year by hundreds of basis points.
Target expressed its inability to quantify the cost or range of costs related to this data breach but expressed its fear that these costs may adversely affect Target's results in a material way. As can be seen in the chart below, Target's stock has continuously lost value since the announcement of data theft in mid-December. The company has lost billions of dollars of market capitalization and has lost around 10% YTD.
. . . . But only for Short Run!
Data confidentiality and security is very important but if we look at the type of data that was stolen we discover that the data was not the type of data that can be used to afflict material damage to the affected guest. It's the type of data that is usually accessible from an individual from social network accounts. Target may be under fire from the media and investors but it is unlikely to be affected by this controversy in the long term. Such controversy seems to be tough on the company and investors but it won't give TGT permanent damage. In the past, TJX (TJX) was hit by a similar scam but emerged from it successfully.
The current fall in price can be seen as an opportunity to invest in the company at its depressed price since there is no damage to the operating capability of the company and there is no reason that customer traffic will not rebound in the future. Currently the company is trading at high yields due to these depressed prices and this calls for a serious look at the investment opportunity.
To aid our decision regarding the fair value of the company we can use the relative valuation model using Target's price earnings ratio, price-to-book ratio, price-to-sales ratio and price-to-cash-flow ratio compared to the same ratios of the industry.
Based on my valuation, Target seems to be undervalued and it has an upward potential of around 40% on the current price. The share price is expected to remain depressed for a few months till the time shoppers begin to forget the data theft scandal and begin to shop again at Target.
TGT has beaten the industry in the last five years in terms of margins. Its five year average gross margin is 31.83% higher than the 22.09% of the industry, its average EBITDA is 10.33% higher than the 7.74% of the industry and its average operating margin is 6.83% compared to the 5.69% of the industry. These high margins suggest that the company has some above average capabilities. However, its average net profit margin is equal to the industry. Where all other margins are above the industry there is still room for improvement and the company should work on its net profit margins. On a whole, the high margins tell us that the company is well positioned in its industry to capture the forecasted rise in demand in the retail industry.
Consistent Dividend Payouts
Target is a consistent dividend payer. Its 1st quarter dividend for 2014 will be the 186th consecutive dividend paid by the company since 1967; the year the company went public. Its dividend grew at a CAGR of over 19% in the last ten years. This depicts Target's investor friendly stance of consistently sharing success with its shareholders.
Retail Industry has to Grow
Analysts are forecasting a growth in retail sales in the coming years. The National Retail Federation's (NRF) retail forecast for 2014 predicts that the US retail industry is expected to grow by 4.1%. This is greater than the 3.7% growth of 2013. According to the report, there is a measurable rise in economic growth along with positive outlook for continued consumer spending that is expected to put the retail industry at a relatively better place in 2014 than before.
In this report, analysts are concerned about the looming debt ceiling debates, regulatory concerns, and increased health care costs that pose a threat to the growth in retail sales but analysts are cautiously optimistic that economic tides in 2014 will change.
I think these are signs of confirmation for long awaited economic recovery in the US economy. The US economy and retail sales are expected to continue to grow in the coming years following 2014. In the presence of a positive outlook for the retail industry, Target is expected to rise with the tide since it's one of the big players in the retail industry.
TGT is a company that is standing on strong footing and can make its way out of trouble like the data theft issue. This problem has caused company inconvenience in the short run but this problem has not done any permanent damage to the company's long term operational capability. Retail sales in US are projected to grow in the coming years and TGT is expected to benefit from it. Company is doing all that can be done to restore customer confidence and I think that TGT will soon be successful in winning back customer confidence. Share price of TGT is attractively low with high yields and high upward price potential as discussed above. Investors should consider investing in the stock before it starts to bounce back after some time.