Target Corporation (NYSE:TGT) has been fighting the data breach concern for quite a while now. The materiality of the issue can be sensed by the fact that the breach reportedly affected around 70 million people. The failure to comply with the confidentiality clause tarnished the company's reputation thus putting a wedge in its revenue base. The recent earnings release, however, significantly diminished the concerns regarding the future performance of the company. The company colossally beat analysts' estimates. Let us see what the financials of the company revealed and which direction the company is expected to take now.
Actual Performance Superseded Expectations
After the security breach issue, analysts and the company lowered their forecasts for the year-end earnings realizing the devastating impact it would have on the company's top line. However, Target did a lot better than projected by analysts. Although the bottom line of the company nosedived by 46% YoY the analysts had been anticipating an even worse impact. In per share terms, the company generated $0.81 compared to analysts' estimate of $0.79. Top-line performance coincided with analysts' expectations suffering a drop of 5.3% YoY to $21.52 billion from $22.73 billion a year ago. Minus credit card revenues, other revenues of the company took a fall of 3.8%.
Customers were repelled from the company this year following the breach leading to a 5.5% drop in the total number of transactions. This is the biggest drop in transactions faced by the company in its history. Comparable stores sales also declined by 2.5%. Evidently, the drop in the top line occurred not only from reduced customer purchases but because the company also had to offer untimely discount offers and rebates to retain its shoppers. A better sales performance this month is indicative of the fact that the efforts have had a positive impact on the overall image of the company; Target plans to offer more promotional discounts in hopes of regaining the trust of its shoppers.
As of now, the company is faced with around 80 lawsuits, which means significant charges are inevitable. Nevertheless, Target maintains a healthy level of cash flows that allays some concerns regarding the company's ability to sustain upcoming charges and/or losses for the time being. Cash flows from operation increased by 17.4% YoY as reported in the recent earnings release. To further enhance its ability to deal with the issue at hand in a dignified manner the company reduced the free cash flow allocation to its share repurchase program. The amount announced for the stock repurchases has been slashed from $4 billion to just $1-2 billion as per the recent disclosure. Again, the company beat analysts' expectations that postulated that there would be no amount allocated to the program this year. The company also increased its dividends by 20% to reward customers for sticking around through the hard times.
Target opened 124 stores in Canada this year to expand its operations outside of the US. This is the first time Target made an effort to expand across geographical boundaries. The initial sales performance in the region fell short of the company's expectations leading to $941 million in operational losses. The loss is attributed to a number of reasons each of which is mentioned below.
- The company had erroneously overstocked its inventory because of the assumption of overly estimated demand. It later led to steep discount offers to clear up the inventory that reduced the operating margin of the company.
- Significant discounts offered from rival competitors made it harder for the company to penetrate the market leading to lower sales than had been anticipated.
- Product prices in Canadian stores exceeded the prices in the US stores. Price differentiation disappointed some customers putting a dent in sales.
- Canadian consumer buying habits differ from US customers.
During the current year, managers are hoping for a better performance as they plan out marketing and promotional programs to differentiate the company's stores from its rivals. Target expects that its losses from the Canadian region will shrink considerably to just $150-170 million. With knowledge gained from its first year in Canada I believe that the company will effectively tailor its services to cater to the specific needs of customer in the region.
Online Sales Department
Realizing the changing consumer behavior, Target is also making efforts to establish its online sales department that it previously outsourced to Amazon (NASDAQ:AMZN). As of now, online sales account for just 2% of total net revenues of the company even though online sales have showed a year-on-year increase of about 20%. Considering that the company has to face tough competition in this field, the improving sales performance cannot be ignored. I believe that the online segment will be able to contribute a higher percentage to the net revenue base as it improves and makes its mark in the online sales market.
I believe that the company is a long-term buy. Although the data breach is a grave issue, its effects have already begun to subside as can be seen in the improving sales and stock market performance. For 2014, the company projects to deliver $3.85 to $4.15 per share compared to analysts' estimates of $4.15 per share. This entails the company's and analysts' confidence in improved performance going forward. As far as the charges related to the data breach issue are concerned, it will continue to impair the top line of the company for some time but the issue will eventually subside.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.