Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



A Data Breach Might Not Be Target’s Biggest Problem

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

It is now estimated that last month's massive Target (NYSE: TGT  ) data breach may have affected more than 100 million customers, with stolen information dating back a decade. Over the next few weeks or months, new facts will emerge as to what exactly happened and why.

However, this data breach might not be Target's biggest problem long term. Target also has to address the growing competition from industry peers Wal-Mart Stores  (NYSE: WMT  ) and Costco Wholesale (NASDAQ: COST  ) , the effects of online retailers like (NASDAQ: AMZN  ) , and the changing retail environment altogether.

Target store. Credit: Company website.

Target's new fourth-quarter outlook
2013 third-quarter earnings for Target shadowed negative trends in recent quarters. Earnings per share came in at just $0.54, missing consensus estimates of $0.64. Revenue also came up short while comp sales increased just 0.9% compared to the 2.9% gain in the same quarter of 2012.

Target has been below EPS estimates in two of the last three quarters and has not met or beat revenue expectations since the fourth quarter of 2012.

The company blames its 2013 struggles on its new Canadian segment. The 124 planned store openings, which began in March 2013, have not gone as smoothly as Target had planned. Excess inventory due to disappointing sales is forcing Target to reduce prices, which consequently negatively affects gross margins.

With more news being uncovered on how widespread the data breach is, Target has now cut its 2013 fourth-quarter outlook by $0.30 and expects comp sales for the quarter to be negative.

TGT Chart

Target data by YCharts

Target vs. Wal-Mart and Costco
One of the main reasons for Target's Canadian market entry was to increase its presence globally and compete with the likes of Wal-Mart and Costco.

Target currently has 1,919 locations, with 122 of the planned 124 in Canada already built. However, this pales in comparison to Wal-Mart's 11,137 company stores across 27 countries including the Supercenter and Sam's Club concepts.

What makes matters worse for Target is that Wal-Mart is now invading areas that have been Target strongholds for years. This past December, the first Wal-Mart store opened in Washington, D.C. Target had little to no competition when it opened its Columbia Heights store in Washington, D.C. in 2008.

Costco's December sales results showed that the membership warehouse continues to gain traction in retail. Net sales increased 6% to $11.5 billion across the company's 648 warehouses, which include more than 200 outside the U.S.

Costco's membership renewal rate is what is really leaving a long-term dent in Target's business model. Costco is currently seeing the highest renewal rates in company history at 90% in the U.S. and Canada, despite the November 2011 membership-fee increases.

Furthermore, the expansion of its ancillary businesses, which include gas stations, pharmacies, car washes, and even travel services, is expected to bring in more members. As a result, the company is giving customers more reasons to go to a Costco and less to visit a Target.

Showrooming for
A 2013 Placed study revealed some of the top retailers that are used for showrooming -- the act of examining products at brick-and-mortar stores before buying those same products on One of the reasons why Target was not the biggest victim of showrooming for was because of its year-round price-matching program. Long term, this program can eventually eat away at margins and limit future earnings potential.

However, more alarming is the growing membership of Amazon Prime -- the $79/year membership program that offers free two-day shipping among other perks for customers. The company stated that it added more than 1 million new subscribers in the third week of December alone. It is estimated that 20 million-25 million U.S. and 15 million international households hold at least one Prime account.

Both of these trends are critical to Target's long-term business model. The Placed study shows that even with price-matching prices, Target is still a victim of showrooming. As more people join Amazon Prime, this means there are more customers with an incentive to stay home and order from than shop at a Target.

The retail promotional environment and improving economy
The promotional environment in retail may also hurt Target in the next several quarters. The domino effect that has been created by retailers attempting to sell off excess inventory at greatly reduced prices may reduce traffic further at Target stores. In particular, customers shopping for apparel may find better deals at their favorite brand-name stores.

Clothing retailers like Abercrombie & Fitch and Eddie Bauer, which have strong online presences, saw strong holiday sales.

As the economy improves, increases in discretionary income may hurt Target further. With extra money to spend, customers may choose to visit the shopping mall or their favorite retailer online instead of Target to buy the things they have been waiting to buy as the economy improves.

Target debit and credit REDcards. Credit: Company website.

Bottom line
The Target REDcard, which gives 5% discounts for all purchases, is a major driver of store traffic. In fact, nearly 20% of all sales are paid for by a REDcard. The entire data breach outcome, which includes the uncertainty of liabilities, reimbursements, and civil-litigation costs, only adds to existing company concerns. It is likely that the data-breach storm will dissipate given enough time. However, growing competition and the changing retail landscape may be Target's bigger problems.

Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.


Read/Post Comments (0) | Recommend This Article (5)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2801437, ~/Articles/ArticleHandler.aspx, 9/1/2015 4:07:28 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Michael Carter

I graduated with honors with a B.S. in Mechanical Engineering from Virginia Tech and later got my MBA from the University of Pittsburgh. I'm a Licensed Professional Engineer (P.E.) for the state of Pennsylvania. As an experienced equities investor and Motley Fool member since 2006, I try to show that investing is not only for the pros.

Today's Market

updated 6 hours ago Sponsored by:
DOW 16,528.03 -114.98 -0.69%
S&P 500 1,972.18 -16.69 -0.84%
NASD 4,776.51 -51.82 -1.07%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/31/2015 4:00 PM
AMZN $512.89 Down -5.12 -0.99% CAPS Rating: ***
COST $140.05 Up +0.10 +0.07%
Costco Wholesale CAPS Rating: *****
TGT $77.71 Down -0.32 -0.41%
Target CAPS Rating: ****
WMT $64.73 Down -0.21 -0.32%
Wal-Mart Stores CAPS Rating: ***