Target Corporation (NYSE:TGT) is one of the leading big box stores in North America and a top competitor of Wal-Mart (NYSE:WMT). It operates its general merchandise stores in the United States and Canada. For those unfamiliar with Target, it offers household essentials, including pharmacy, beauty, personal care, baby care, cleaning, and paper products; music, movies, books, computer software, sporting goods, and toys, as well as electronics that consist of video game hardware and software; apparel and accessories, such as apparel for women, men, boys, girls, toddlers, infants, and newborns, as well as intimate apparel, jewelry, accessories, and shoes.
The company also provides food and pet supplies, including dry grocery, dairy, frozen food, beverages, candy, snacks, deli, bakery, meat, produce, and pet supplies; and home furnishings and décor, such as furniture, lighting, kitchenware, small appliances, home décor, bed and bath, home improvement, automotive, and seasonal merchandise comprising patio furniture and holiday décor. This is but a small laundry list of the merchandise offered. Target also operates a successful online sales enterprise via target.com.
After much of the drama surrounding the credit card theft from Target’s data breach, I felt it prudent to examine Target’s recent performance to see if the stock is a buy after dropping over 20 percent from its recent highs.
To be honest, Target performed poorly. It missed analyst estimates and saw its profits drop year-over-year. First-quarter net earnings were $418 million, or $0.66 per share. Adjusted earnings per share were $0.70 in first-quarter 2014, a decrease of 13.9 percent from $0.82 in 2013. In the U.S., first-quarter 2014 sales increased 0.2 percent to $16.7 billion from $16.6 billion last year, reflecting the contribution from new stores partially offset by a (0.3) percent decrease in comparable sales. U.S. earnings before interest expense and income taxes were $1.072 billion in first-quarter 2014, a decrease of 13.5 percent from $1.239 billion in 2013.
In Canada, in first-quarter 2014, sales were $393 million, compared with $86 million in first-quarter 2013 when Target opened its first 24 Canadian stores. So there was improvement here thanks to the growth. Factoring in this growth, you can see how poor the overall earnings really were compared to 2013.
Canadian earnings before interest expense and income taxes was a loss of $211 million in the first-quarter 2014 compared with a loss of $205 million in 2013. Target’s first-quarter 2014 net interest expense decreased to $170 million from $629 million in 2013. The year-over-year variance is primarily the result of a $445 million early debt-retirement charge in first-quarter 2013. The company’s effective income tax rate was 34.7 percent in the first-quarter, compared with 36.0 percent in first-quarter 2013. The decrease of 1.3 percentage points was due to a variety of factors, none of which was individually significant.
John Mulligan, Interim President and CEO, CFO of Target stated:
First-quarter financial performance in both our U.S. and Canadian segments was in-line with expectations, reflecting the benefit of continued recovery from the data breach and early signs of improvement in our Canada operations. While we are pleased with this momentum, we need to move more quickly. As a result, we have made changes to our management team and are investing additional resources to drive U.S. traffic and sales, improve our Canadian operations, and advance our ongoing digital transformation. We have updated our 2014 earnings expectations to reflect the impact of these investments and believe that they position Target for accelerated profitable growth as a leading omnichannel retailer.
Looking ahead to the second-quarter of 2014, the company expects adjusted earnings per share, reflecting operating results in its U.S. and Canadian segments, of 85 cents to $1.00. This measure excludes approximately losing 2 cents any net expenses related to the data breach. For full-year 2014, Target now expects earnings of $3.60 to $3.90, compared with prior guidance of $3.85 to $4.15. This reduction is a major red flag in my opinion.
Further disheartening is that the company is unable to estimate future expenses related to the data breach that occurred in fourth-quarter 2013. Expenses may include payments associated with potential claims by the payment card networks for alleged counterfeit fraud losses and non-ordinary course operating expenses (such as card re-issuance costs), REDcard fraud and card re-issuance expense, payments associated with civil litigation, governmental investigations and enforcement proceedings, expenses for legal, investigative and consulting fees, and incremental expenses and capital investments for remediation activities. These costs may have a material adverse effect on Targets results of operations in second-quarter and full-year 2014 and future periods.
In summation, Target is still reeling from the data breach last year. It has had a lasting impact. Despite growing exponentially in Canada, earnings were down 15 percent year-over-year for this quarter. The company has lowered its guidance for the year and cannot anticipate the impact of more costs related to the data breach. As such, Target stock is to be avoided at current levels. I think that once the impact of the data breach is overcome, the company will regain its growth and increase earnings, likely by the fourth-quarter. Until then, I would hold the stock, but would not sell the position nor buy at this level.
Disclosure: Christopher F. Davis has no position in Target and no plans to initiate a position in the next 72 hours. He has a hold rating on Target stock and a $50 price target.