Target Looks Intriguing After Earnings

Source: Thinkstock

Source: Thinkstock

On Wednesday morning Target Corporation (NYSE:TGT) posted its first quarter earnings figures. As expected, the numbers were down year over year given the devastating data breach which the company experienced back in December. Specifically the company earned $0.66/share, or $0.70/share adjusted for one-time items. This latter number is down 13.9 percent from last year’s $0.82/share earnings from the first quarter of last year.

The decline is largely due to customer concerns regarding December’s data breach, in which intruders gained access to privileged information such as payment card information. The media made a big deal out of this and American consumers are evidently less willing to use their credit cards at Target or to sign up for Target credit cards. This has hit company earnings, and it will continue to do so for the foreseeable future.

That’s the bad news. The good news is that the stock is down rather significantly from $73/share at its peak to $57/share today. For a company that is fairly stable such as Target this is a substantial decline. It also means that longer term investors are potentially being given an opportunity. Earnings are down, and so the stock appears to be somewhat expensive at about 19-times earnings. For a retailer that is seeing its earnings decline, this is expensive. But, at the same time, the data breach is likely only to impact the company in the shorter term.

Furthermore, the impact has primarily hit earnings. Keep in mind that retailers have high fixed costs, and so a small decline in same store sales can have an amplified impact on earnings and on margins. This is precisely what we are seeing with Target. In fact the company reported a 2.1 percent increase in its overall sales from the first quarter of last year despite the data breach. This is a good sign, especially in a weak retail environment.

Going forward Target admittedly has unknown charges related to the data breach, and if these come in larger than expected then the stock can take a hit. But investors already know that something is coming. There are claims from those materially impacted by the breach, and then there will be litigation fees as Target sorts out its share of the liability with insurance companies and credit card companies.

We should also expect that consumers will remain reluctant to shop at Target, especially if they want to use credit cards. However this fear with dissipate, especially since Target has carved out its own market niche: like Wal-Mart (NYSE:WMT) it provides consumers with a place to buy a wide variety of low-cost merchandise, but it also has a social conscience in that it donates 5 percent of its profits to charities. Many consumers also believe that shopping at Target is a far better experience aesthetically. So, while the company may face problems in the near term, it should be on track again in three to five years, and there is no reason why the shares cannot trade at over $70/share again.

In the near term, I think we will continue to see weakness in Target shares. Investors are still jittery about the company in particular and retail stocks more generally, which have underperformed the market by about 8 percent year to date. But I think that investors can buy weakness in Target. The company has a long history of growing its business and returning capital to shareholders through dividends and stock repurchases. The data breach, while damaging to the company is hardly fatal, and it has provided long term investors with an opportunity to pick up the stock at a good price.

Disclosure: Ben Kramer-Miller has no position in Target.

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