Target: Opportunity or Still in the Cellar?

To figure out Target's potential  (NYSE: TGT  ) over the next year, we need to look at some key numbers. At the same time, one non-event as well as one key comment might be the clearest indications of the company's potential over this time frame.

Numbers tell a story
In the fourth quarter, Target suffered a 2.5% comps decline. This is exactly what Target had predicted following the data breach, which is a positive sign. It's always comforting to investors when a company tells the truth.

If you're looking at this comps decline from a factual perspective while eliminating expectations, then it's a negative. You could point to the fact that comps were on track to grow prior to the Dec. 19 announcement of the data breach, but so what? The data breach is an event that actually took place. Therefore, it matters.

Source: Target


Let's take a look at the bigger picture. For the 12 months ended Feb. 1, comps suffered a 0.4% slide year over year with transactions declining 2.7%. On the other hand, those who shopped at Target generally spent more than in the prior year, with the average transaction amount increasing 2.3%. On top of that, REDcard sales (credit plus debit) jumped 19.3%. 

Up until this point, it might seem difficult to tell which way Target is heading. It's important to note that in addition to the data breach, Target is also struggling in Canada. For instance, while overall full-year diluted earnings per share came in at $3.07, that number was negatively affected by $1.13 due to Canada.

Now for that non-event and important comment.

What to worry about
When a company faces a PR nightmare, someone in upper management will sometimes buy a boatload of shares, putting his own money on the line. However, this only happens if that individual is highly confident in the company's future prospects. While it's highly likely that Target will eventually get back on track and be a long-term winner, nobody knows how long this will take.

Upper management has a much better idea than the public, and a relatively large insider purchase would demonstrate conviction. This non-event isn't a negative, but it does show that no one has stepped up to the plate, possibly because they know more pain is to come.

As far as that comment goes, this doesn't pertain to a personal comment but a comment written in the quarterly report, which was as follows: "At this time, the company is not able to estimate future expenses related to the data breach." 

Investors can handle bad news better than uncertainty. Without knowing what headwinds must be dealt with around the corner, investors get nervous. Target might not know what the future holds concerning future expenses due to the data breach, but that doesn't make this news any more comforting for investors.

Target will potentially have to contend with the following: claims by payment networks, card reissuance costs, civil litigation, government investigations, and remediation expenses -- just to name a few. However, the biggest hit isn't increased expenses but a loss of customer trust. For that reason alone, you might want to look into Wal-Mart Stores (NYSE: WMT  ) or Costco Wholesale (NASDAQ: COST  ) . It's going to take time for Target to regain customer trust. 

Investing in the right discount retailer
Wal-Mart recently reported subpar results, which had a lot to do with targeting the low-income consumer who is struggling at the moment. Fortunately, Wal-Mart's massive cash flow generation -- $23.3 billion in operating cash flow over the past year -- makes up for this setback ... if you're looking for a solid dividend play. At the moment, Wal-Mart offers a dividend yield of 2.6%.

Target generated $6.7 billion in operating cash flow over the past year, and it currently offers a generous dividend yield of 3.1%.

Costco only generated $3.3 billion in operating cash flow over the past year, and it only offers a dividend yield of 1.1%. On the other hand, consider the five-year chart below. Costco might not be the best option for dividend investors, but it is growing the fastest: 

COST Revenue (TTM) Chart

COST Revenue (TTM) data by YCharts

The Foolish takeaway
If you want to attempt to pick a bottom in Target, then you might still have an opportunity to get on board. However, this is guesswork. If you're looking at this from a Foolish perspective, then Costco is clearly the most efficient company of the three at the moment. The only reason not to consider Costco first is if you're looking for dividends as opposed to growth. Please do your own research prior to making any investment decisions.

Are these the next two Wal-Mart's? If so, there's enormous potential. 
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.


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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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8/28/2015 11:08 AM
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