Seeking Alpha
Portfolio strategy, restaurants, long/short equity, brick & mortar retail
Profile| Send Message|
( followers)  

Summary

  • On Tuesday, Target lowered its second quarter forecast.
  • Between the data breach and disastrous entrance into the Canadian market, faith in the company is being tested.
  • I see everything going on as an opportunity to buy low.

Life has been rough for Target (NYSE: TGT) over the past year. On Tuesday, the company lowered its second quarter forecast due to expenses tied to the massive data breach in December and an early retirement of debt. Expenses related to the data breach are expected to come to $148 million and $1 billion was paid to retire $725 million in debt. Adjusted EPS are now at $0.78, down from the previous range of $0.85 to $1.00 per share. Additional factors behind the decrease in forecast are: flat sales in the U.S., lower than expected margins, and continued struggles in the Canadian market.

Shares of TGT were trading at $57.40 today. This is a 20% decrease from the price exactly one year ago on August 6, 2013, at $71.79. I see the current low price of the stock and Target's plan to overcome the troubles faced this year as an opportunity to buy low.

1. Data Breach

In December 2013, Target suffered a data breach. An intruder stole payment and customer information through unauthorized access to the Target network. Not only is this going to cost Target $148 million in expenses this quarter, but the theft also hurt the company's reputation.

However, it seems like Target is beginning to see the light at the end of the tunnel. In the Q1 earnings report, the company reported that through surveying customers, they are increasingly hearing that customers have put the breach behind them and are resuming their Target shopping habits. The company has also decided to move all REDcards under Mastercard's industry leading chip-and-PIN technology to even further restore customer confidence in the brand.

In addition, Target launched a social responsibility Back-To-School campaign. The campaign pledges to donate one school supply item to a needy student for each select Up&Up school supply bought in stores from July 13 to August 2. Not only will this campaign likely boost the Target brand image, but should also increase brand recognition of Target's private label Up&Up brand (good news for margins). Although the data breach was a huge blow to the Target stock price, we can expect to see the brand begin to recover after the expenses are paid off this quarter.

2. Canadian Expansion

Target experienced a disastrous entrance into the Canadian market, which has so far cost the company $1 billion. Problems with the expansion included overexpansion, supply-chain troubles, and price mark-ups compared to similar products in the U.S. The head of Canadian Operations has since been fired, and additional actions are being taken to improve the business. In the Q1 earnings report, the company cited important changes to the Target Canada leadership team and overall operations:

As a result, we're beginning to see improved guest satisfaction measures regarding in-stocks and price perception. While these early signs of progress indicate that we're moving in the right direction, we're committed to moving faster (excerpt from Q1 Earnings Call).

The implications behind this are a negative impact on margins short-term, but value potential for shareholders in the long-term.

3. Weak E-Commerce Presence

Target has not yet been able to make a strong entry into digital sales. Target only gets about 2%-3% of their sales online, which is less than the industry average and much less than competitors such as Wal-Mart (NYSE: WMT). While some may view this low percentage as a serious red flag, I view this an enormous opportunity for Target to grow and increase overall sales through leverage of e-commerce. Investments are being made to improve e-commerce, and I'm optimistic.

However, Target is currently performing well in m-commerce (mobile-commerce). Target has launched an application called Cartwheel for customers to use in-store. The application essentially provides discounts to customers based upon past purchases and customer metrics. The potential for m-commerce in retail stores is enormous, because it enable the retailer to get closer than ever before to the point of purchase. The closer you can get to the point of purchase, the stronger your influence on prompting a purchase. Although Target has not provided financial data on the results of the application, executives told investors that Cartwheel users spent approximately 30% more per trip to a Target store, and users visited stores more often. As the application grows and customers become more comfortable and familiar with the concept of m-commerce, this application has the potential to have a huge impact on sales.

Call me optimistic, but I see the opportunity behind all the struggles Target has faced this past year. Last week the company named PepsiCo (NYSE:PEP) executive Brian Cornell as its CEO. Cornell will be the first outsider to serve as CEO of the company when he starts next week. I foresee him bringing a fresh, beneficial perspective to the company. I suggest to buy TGT low, and watch it grow in the long-term.

Source: Right On Target