Target's Turnaround Falls Flat

The lingering effects of a massive security breach, combined with a weak international push, have put Target on its heels.

May 21, 2014 at 4:05PM

On Tuesday, Target (NYSE:TGT) announced that its head of Canadian operations was out. On Wednesday, it announced that Canadian sales weren't quite up to snuff. "While we are pleased with [the Canadian segment's] momentum, we need to move more quickly," interim CEO John Mulligan said in the big-box retailer's first-quarter earnings press release. The 127 stores in Canada put up meager gross margin and posted a pretax loss for the quarter.

On top of the Canadian debacle -- or débâcle, if you're Québécois -- Target is still trying to claw back cautious consumers who got burned late last year when the company's sales terminals were hacked. Sales growth in the U.S. has been less than stellar since the data breach, and this quarter was no exception.

So is Target an opportunity for investors, or does the time frame for a turnaround make this one to avoid?

Target's trouble in Canada
Maybe it wasn't all that bad -- or maybe it was, but we were expecting worse. Analysts had pegged Target's comparable-store sales to fall even further than they did. The fact that they didn't crash as hard as expected led some outlets to call this the beginning of a turnaround.

"Turnaround" is a strong word, though, and it indicates that things are moving in the right direction. Target's sales are still slipping, and it has dropped a fortune into Canada for what so far have been subpar results. Target added 103 stores in Canada over the last year, and while earnings rose, gross margin got crushed.

In part, that's because last year the company had a bunch of new stores with new merchandise and so very little was on promotion. Nonetheless, Target's U.S. segment sat on a 29.5% gross margin in the most recent quarter, while Canada managed just 18.7%. This says Target is having trouble getting customers through the doors up north, and it can't blame the data breach -- Canadian stores were unaffected by that.

The head of the Canadian segment, Tony Fisher, had been with Target since 1999, but couldn't find a way to make the company's first international foray successful. Canadian shoppers have been unimpressed with their nation's iteration of Target, and retail analyst Luke Sklar said the company's misreading of the Canadian customer was a "shocking level of misstep." 

Back in the USA
Canada wasn't the only problem for Target, though: U.S. comparable-store sales were down 0.3% for the quarter and total revenue was effectively flat. That 29.5% gross margin represented a drop of 1 percentage point.

The company has seen weakness in foot traffic, and said that it would invest in programs to increase customer visits. Those investments mean Target is now looking at lower annual earnings per share. The company dropped its full-year 2014 forecast from $3.85 to $4.15 to between $3.60 and $3.90.

From the size of this investment, it appears Target expects a significant amount of work before things are back to where they need to be. I think the company is doing better, but calling this a turnaround seems premature. There's still some muddy water to tread through, and I'd be surprised to see solid -- which is to say, over 3% -- comparable-store sales growth any time before the end of the year. Look for better news once the anniversary of the breach rolls around.

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Andrew Marder 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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