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Target Strikes (Out) Again

If you read my articles regularly, then you already know that I had gone from Target (NYSE: TGT  ) bull to Target bear. This had everything to do with the data breach, which had supposedly affected 40 million customers. The reason I turned bearish: I believed customer loyalty would wane due to mistrust; expenses would increase related to heightened call volumes leading to the need for more employees, and also due to the need for technological advancements for better customer protection; and that lawsuits were a near guarantee. While all recent developments for Target still add up to a net negative, there are some hints that this big-box retailer might still present a good long-term investment opportunity. 

Expected results
The first thing you should know is that Target now expects up to 70 million customers have been victimized by the data breach, with names, mailing and email addresses, and phone numbers potentially stolen. This increases the likelihood of identity thefts.  

Target has lowered its fourth-quarter adjusted earnings-per-share expectations to $1.20-$1.30 from $1.50-$1.60. This is primarily related to an expected year-over-year comps decline of 2.5%. Target previously expected comps to come in flat. The culprit for the significantly reduced comps expectations: the data breach.

If Target is expecting a 2.5% comps decline in sales, then those sales have to be moving somewhere else. The two most likely beneficiaries are Wal-Mart Stores (NYSE: WMT  ) and (NASDAQ: AMZN  ) .

Most shoppers still prefer to shop in brick-and-mortar stores. Therefore, a good portion of former Target shoppers who have lost confidence in the retailer will now shop at Wal-Mart. With more than 11,000 stores in the United States, it should be easy for former Target shoppers to find a nearby Wal-Mart location, whether it's a Walmart Supercenter, Walmart Discount Store, Walmart Market, or a Walmart Express.

Those who are more comfortable with technology and ordering online might opt for Amazon. And it's safe to assume that recent events at Target will lead some people to attempt online shopping for the first time. If they use Amazon and they're like most people, they will fall in love with the service, which is a clear potential benefit for Amazon. 

So ... what's the good news for Target?

Tidbits of good news
Prior to the data breach being reported on Dec. 19, 2013, the company's fourth-quarter sales were stronger than expected, and REDcard penetration was in line with expectations.While the data breach has since negatively affected REDcard penetration, Target has reported (without specifics) that it is still higher than in the year-ago quarter.

The REDcard news is a positive. As far as sales being stronger than expected for the quarter prior to the data breach, this could be a long-term positive. The data breach is likely to be a short- to medium-term event. Yes, Target will lose market share. And, yes, Wal-Mart and Amazon are likely to benefit more than anyone else. But if you're looking at the long term, the data breach will eventually be forgotten about. Look at TJX  (NYSE: TJX  ) as an example. Its data breach took place in 2006. Look at how it recovered:

TJX Revenue (TTM) Chart

TJX revenue (trailing-12-month) data by YCharts.

This isn't to say Target's recovery will be as impressive. It's simply an example. People only remembered the TJX data breach after the Target data breach took place.

The ultimate point here is that if Target sales were better than expected prior to the data breach, then the company was doing something right. Eventually, the data-breach news will blow over, and Target will be back on its feet. However, this doesn't mean Target is likely to present a good investment option at this time. But if you wait for a stock dip over the next few months, then it's likely to present a good long-term opportunity.   

The bottom line
Though Target's long-term potential is good, following the money -- in this case, consumer money -- is often a good idea. If Target's fourth-quarter comps are expected to decline 2.5%, it means that some previously loyal shoppers are spending their money elsewhere. While this could mean a variety of locations, being that Wal-Mart is the largest retailer in the world and Amazon is the largest online retailer in the world, they would be logical beneficiaries. 

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Read/Post Comments (5) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 13, 2014, at 7:54 PM, etbob1 wrote:

    Identity theft could have been going on for months or years at Target, Will shoppers ever really know when it is safe to use a card there?

  • Report this Comment On January 14, 2014, at 7:36 AM, jdmeck wrote:

    If Target hits $55 I'm buying.

  • Report this Comment On January 14, 2014, at 7:58 AM, Kaye wrote:

    think about when a company seems to do well or does not have major issues another company will shut it down or cause problems. Walmart had and will always have problems so will Amazon because of the competition. Target is doing well in the food department. I am not an employee of either. But it might be someone from Walmart causing the problem you know it is no secret companies do it all the time example Toyota and Honda sells great cars someone was jealous and threw a wrench ?? Could have worked undercover to cause the problem diberately

  • Report this Comment On January 14, 2014, at 8:03 AM, luciearl wrote:

    This commentator obviously is not a Target shopper. To say TGT shoppers will now switch to Walmart, is to say fine diners will switch to Burger King. Target is a refreshing shopping experience. Target is top shelf and will handle this breach in the best way possible. They will do everything possible to correct this situation while other mammoth retailers observe what to do(at Target's expense). This could also happen them, so everyone is on their toes and taking notes from Target. To not have faith is Target, is to not have faith in the U.S.

  • Report this Comment On January 14, 2014, at 4:19 PM, colleenarn wrote:

    @luciearl really...."to not have faith in Target, is to not have faith in the U.S." bold statement because @ this point in time both have lied to us and this is not a good comparison.

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Dan Moskowitz

Dan Moskowitz spends the majority of his time researching stocks. He believes that fundamentals, and logic pertaining to industry trends, win out over the long haul.

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