Let's get the obvious out of the way before we get to the good stuff. Target (TGT -0.70%) was recently victimized by a data breach that affected up to 40 million customers. Wait a second... scratch that. After further investigation, let's make it 70 million customers.
Based on this event, Target now gave fourth-quarter comps guidance of negative 2.5%. Ouch! That's quite a drop from the previously expected flat comps for the quarter.
Furthermore, and as I have written in many other articles, Target is dealing with a decline in loyalty and positive sentiment, and it must contend with increased costs due to more hires to handle excessive call volumes, as well as increased costs for technological innovations to help better protect its customers. And let's throw in lawsuits for good measure, including two dozen from customers and one from Putnam Bank. To add insult to injury, the recent data breach has likely led to market-share gains for Wal-Mart Stores (WMT 1.32%), Amazon.com, and Costco Wholesale (COST 0.17%).
With all of these negatives, how could anyone possibly be bullish? Below are three reasons.
1. Target market
More than 50% of Target's customers are college graduates. Being that Target is a discount retailer, this might surprise you. But if you exclude discount-membership stores, such as Costco, can you think of any discount retailer that caters primarily to this market? It's possible I'm drawing a blank, but I can't. People with college degrees are likely to earn more money than those without college degrees. Therefore, Target attracts more people with spending power than peers like Wal-Mart. This fact alone gives Target strong growth potential, especially if it can find high-potential markets for expansion.
2. Fighting off a major threat
If you exclude the data breach, you will see that Target successfully fought off the showrooming threat. How? During the holiday shopping season in 2012, it offered price matching. Price matching was once again available during the 2013 holiday shopping season, from Nov. 1 to Dec. 21. If you could find a product for less at a competitor, Target would match the price. The showrooming threat died.
3. Technological advancements
Target opened its technology innovation center in San Francisco in May 2013. This led to the Target Awesome Shop, a site where the most "pinned" Target items and highest-rated products on Target.com are showcased. The concept is simple: Customers are choosing from what other customers think are the most impressive Target products.
Another technological advancement: A Bullseye View. This is a Target blog that offers information on topics such as fashion and beauty, lifestyle, and entertainment. You can also find company news. The blog is in its infant stages, and it puts Target in the information space as well as the retail space. If Target can make this site primarily focused on popular topics and provide quality content, it could end up being a revenue driver in the future.
A final technological advantage for Target is that it consistently tracks customer habits through credit card and REDcard purchases, as well as via in-store Wi-Fi. This allows Target to improve its merchandising and to offer customer-specific offers.
Taming the bull
Here's the point. Which do you think will last longer: the data breach leading to negative sentiment or the three positives listed above? Of course, the latter. That said, if you're looking for a short-term trade, then Target isn't for you. Target is likely to suffer from the data breach in many ways. The key is that this storm will pass. If you would prefer to invest in a discount retailer that offers both short- and long-term potential, then you might want to consider Wal-Mart or Costco.
Wal-Mart caters to a much wider audience, and its total sales are four times that of Target. If Wal-Mart continues its geographic expansion, and in many different forms (Wal-Mart Market and Wal-Mart Express included), then Wal-Mart should continue to grow. And the recent data breach situation at Target is likely to give Wal-Mart a little boost in sales. But Costco has been even more impressive.
Costco recently reported December sales, and not surprisingly, they were impressive. Sales increased 6% to $11.5 billion year over year. If you look at the big picture, an 18-month time frame, sales also jumped 6%, to $38.3 billion. All-important comps were also impressive, growing 3% in December as well as 3% over an 18-week period. This indicates customer loyalty.
The bottom line
This exact moment isn't the best time to invest in Target. However, you should have a good opportunity to invest in Target at an appealing discount at some point over the next several months. Target's data breach will be the primary culprit for a likely sell-off in the stock price, but it will still eventually be a passing event. Target's innovative ways should make it a long-term winner.
If you would prefer to invest in a larger enterprise that can withstand just about anything aside from a nuclear war, then you might want to consider Wal-Mart. Thanks to significant cash flow generation, your dividend payments are safe. And Wal-Mart should continue to see slow and sustainable growth thanks to its enormous customer base and new store formats.
As far as Costco goes, it should be appealing to any investor. Its business model has proven to be highly effective, comps are growing in a difficult consumer environment, and growth has been consistent for years.
