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Summary

  • The consumer confidence level is returning to pre-financial crises levels as employment rates increase.
  • Target’s collaboration with Altuzarra could help bolster sales in the future, especially since the brand is rapidly gaining popularity.
  • In Canada, the company is facing serious supply chain issues that have left a bad taste in the mouths of Canadian consumers.

I reckon you remember how Target Corp. (NYSE:TGT) found itself in the middle of data breach issues followed by a mountain of law suits just a few months ago. Also, the company's operations in Canada showed a lousy performance as well since local Canadian retailers pulled up their sleeves in the face of upcoming competition from one of the leading US retail stores. The following discussion encompasses the latest quarter's earnings in comparison with analysts' estimates and what the company is doing in order to strengthen its revenue and margin performance in the future.

Recent Performance Fell Short of Expectations

The company's earnings performance remained disappointing even as the top line exceeded analysts' expectations. The bottom line of the company declined 16% YoY over the first quarter of FY2014 to $0.70 per share against the consensus forecast of $0.71 per share. However, the revenue base edged up to $17.05 billion compared to Thompson Reuters' estimates of $17.01 billion. Sales remained flattish in the US and grew by only 0.2% YoY to $16.7 billion but the comparable store sales figure dropped 0.3% YoY.

In Canada, sales have begun to pick up as revealed in the latest earnings report. Canadian revenues grew 357% YoY to $393 million from $86 million a year ago. However, the sales figure did not meet the forecasted figure of $400 million. In the foreseeable future, the same issues discussed in my previous article are expected to continue hindering the region's sales. In the US, the data breach hurt the company more than it probably anticipated. Where the retail sector faced challenging winter weather coupled with consumers' changing purchasing habits, Target underwent a more challenging time. The data breach swayed consumers' loyalty which resulted in in-store sales plunging 2.3% according to the latest earnings report. In addition to faltering sales due to a drop in walk-in customers the company offered extensive discount packages in an effort to bring them back to the store. All in all, the company's top line was hit hard by a double edged sword.

Future Outlook

The company is working to strengthen both its US and Canadian segment sales with heavy discounts offered in both regions. This is one of the reasons why I believe the company is going to report weak profits this year as well. However, the picture is not as bleak when you start considering what might happen in the long term.

Let us first take a look at the US segment. Macroeconomic factors are hampering sales across all the retailers in the region. However, those concerns have begun to soften as unemployment rates fell and the consumer confidence index increased according to recently reported data. Nielsen reports indicate that the consumer confidence level is returning to pre-financial crises levels particularly as employment rates returned to pre-crises levels. The US consumer confidence cut past 100, which indicates an increase of about 6 points compared to the previous quarter. This figure alone is enough to gauge the potential rise in future retail sales.

In order to fix the data breach issue that affected millions of customers the company has upped its security technology to ensure customer security in the future. This has cost the company about $100 million. This too will impact the overall bottom line towards the end of FY2014; however, the results might be positive in the long term. In addition to that, the company is taking steps to strengthen its US segment's sales. The most recent collaboration is with Altuzarra which is a ladies fashion brand that manufactures ready-to-wear apparel, accessories, and shoes. Altuzarra's products will be dispatched through all of the company's distribution channels including US and Canadian retail stores and online. Target's apparel products' sales fell over the quarter so this collaboration could help bolster product sales in the future especially when the brand is rapidly gaining popularity.

In the Canadian segment problems are expected to continue over the short term. The Canadian consumer base is still unsatisfied with the brand due to a number of factors that I discussed in my previous article. The company is facing serious supply chain issues which have left its Canadian consumer base unsatisfied. The company has faced about $1.6 billion in losses from this end up till now and is expected to report even more as long as its supply chain problems persist. However, in the long term I believe that Canada will begin to report positive results as the company learns more about consumer demographics in the region and makes changes accordingly.

Conclusion

Target generously rewards its investors through dividends and share buybacks. Target's dividend yield presently stands at 3.07 in an industry where 1.74 is the norm. With this dividend and the fact that I expect the sales of the company to improve in the future, the stock looks like a buy to me.

The company's share price has declined by approximately 12% since the start of this year. Such a weak share price further compels me to give the company buy rating. The company is making extensive investments to fix the technological issues that the caused data breach and is taking steps to improve both its US and Canadian sales. The collaboration with Altuzarra is very likely to improve the sales figures of the company in the future; however, the improvement may be offset by the weakness in Canadian sales over the short term.

Source: Target Can Bear Fruit Over The Long Run