Should Investors Count on a Turnaround at Target?

Target has fallen upon bad times, but can it make a strong comeback?

Mar 19, 2014 at 6:30PM

Target (NYSE:TGT) has fallen upon bad times, but investors remain optimistic about the retailer's prospects going forward as the spike after its recent fourth-quarter results shows. The biggest nightmare that haunted Target in the fourth quarter was the data breach during the holiday season. Along with that, Target's entry into Canada, its first market outside the U.S., wasn't encouraging.

Although the results were not as bad as Target had expected, the company needs to work hard to mend the damage that has already been done. It has to win back the faith of its customers, or they might turn to other retailers such as Wal-Mart (NYSE:WMT) and TJX Companies (NYSE:TJX). Moreover, Target needs to get back on the growth path as its revenue and profits took severe hits during the previous quarter.

Target faces difficult times
Target's revenue declined 5.3% to $21.5 billion, while net income fell 46% to $520 million. However, the stock price jumped the most in four years after the company announced its fourth-quarter results as Target reassured customers that the data breach wasn't as bad as expected. So, Target's fourth-quarter wasn't as bad as expected, but can the company continue to rebound successfully?

This is a pretty difficult question to answer. Target is still trying to clear its image, which was tarnished by hackers who stole around 40 million payment card numbers and an additional 70 million records. This was probably the biggest data breach after what TJX faced in 2007. However, Target undertook various initiatives to cover this loss. It has assured its customers that they will not face any liability for unauthorized charges resulting from the breach.

Target tries to bounce back
Target has also increased fraud detection for REDcard holders and extended free credit monitoring and identity theft protection to any customer who has shopped at Target. In this regard, CEO Gregg Steinhafel said,

"...we're committed to an end-to-end review in cooperation with third-party experts to understand how the breach occurred, the identification and acceleration of solutions to provide enhanced protection in the future and engagement with third-party experts to protect the industry and consumers from future threats." 

Also, the strong financial standing of Target gives the company some relief, as it can absorb the near-term financial impacts of the breach while investing in long-term projects at the same time. Apart from store sales, Target is extending its reach through its website and mobile apps. As a part of this effort, Target has acquired Chef's Catalog, cooking.com, and Dermstore, which will provide its customers access to high-end brands in the home and beauty categories. 

Target is also experimenting with its store design. Apart from its routine large stores, it has developed a smaller-store format known as Target Express. The company believes that this new design will provide it with ample opportunity to expand into new areas. It plans to open its first pilot store in Minneapolis, its home market, in order to study its operational and financial results. Target has also come up with an order online and pick-up in-store facility. With all these changes, management hopes to overcome the short-term hurdles.

Potent competition
However, Target has to face tough competition from retail giants such as TJX which could hurt its Canadian operations. Target is struggling to make an impression on Canadian customers. Although it opened 124 stores last year in the country, it didn't get the merchandising right and it ended up charging more for its products in Canada than it does in the U.S. As a result, Target lost $941 million in Canada last year. 

In comparison, TJX has a strong presence of around 350 stores in Canada, and the company is rapidly expanding its operations in the region. TJX's Canadian stores performed well during the previous quarter with their comp sales rising 5%. Going forward, TJX believes that it will be able to expand its Canadian operations to 430 stores, with 20 stores planned in the current fiscal year. So, Target's Canadian adventure is on shaky ground as TJX already has a strong presence in the country.

Also, Target could face tougher competition from Wal-Mart in the U.S. Wal-Mart is aggressively expanding its Express format as the retailer plans to open 120 such stores this year, a massive increase from the 20 stores that it had last year. In addition, Wal-Mart plans to open 160-180 Neighborhood Markets stores this year. These smaller-store formats will expand Wal-Mart's reach into residential areas, leading to stronger competition for Target.

Bottom line
Target has faced some trying times recently. However, the company made some moves to get back on track as we saw above. However, Target seems to be late to the market with its Express format as rival Wal-Mart is accelerating the roll-out of its own small stores, while Target's foray into its first international market (Canada) has fallen flat. Although the stock spiked after the results, I think it is still premature to expect Target to get better any time soon.

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Mukesh Baghel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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