Why Investors Should Be Cautious About Target

Data breaches and issues in Canada casts doubt on Target's long-term future.

Jun 4, 2014 at 10:00AM


With the recent data breach Target (NYSE:TGT) consumers have good reason to be wary of shopping there. Target's entry into Canada last year proved less than stellar as prices were less than competitive and left customers discouraged. All of these problems resulted in eroding fundamentals and a dimmer long-term outlook. Let's explore these issues in more detail to see why investors should heed caution before investing in Target.

Data breach cost? Who knows
In the most recent earnings announcement, Target had this to say about estimated future expenses stemming from the data breach, "At this time, the Company is unable to estimate future expenses related to the data breach that occurred in fourth quarter 2013." In summary, the company went on to discuss legal and other expenses stemming from possible card reissuance expense, "REDcard fraud", "government investigations", capitalized expenses for remediation activities, etc. 

Consumers, who lost faith in the company, will think twice before shopping in a Target. Target loses out on consumer engagement and the use of valuable demographic data that comes from consumer usage of the card, making it more difficult for the company to make decisions when catering its selection to customers.

Low price leader? Not in Canada
In March 2013, Target decided to enter Canada in order to expand its global presence.  This proved disastrous for the company. The Canadian division lost $941 million before interest and taxes in 2013.  The red ink continued in the most recent quarter with the division losing $211 million more before interest and taxes. 

The culprit lies in higher merchandise pricing in comparison to its competitors and other Targets near the U.S./Canadian border. Target's Canadian expansion is now hampered by a disgruntled consumer base in the country and it now faces the added task of winning customers back in addition to figuring how to expand its market presence in the country.

Management turnover may serve as a temporary deterrent to resolving these problems as new managers settle into their new roles. Target's former CEO Gregg Steinhafel was fired by its board of directors and replaced by interim CEO John Mulligan.  The president of Target Canada Tony Fisher got replaced by Mark Schindele, Target's former senior vice president of merchandising operations.  Target also made a myriad of lower level management changes as well. 

Target's annual revenue only expanded 11% over the past five years. Its net income and free cash flow were down 21% and 26% during the same time frame.  During the most recent quarter, the company expanded its revenue 2%.  New stores contributed to top line growth. Net income declined 16% while free cash flow registered at a negative $36 million  during the most recent quarter. A declining number of transactions in the U.S. most likely stemming from the data breach and inventory markdowns in Canada as a result of pricing issues contributed to Target's erosion of fundamentals. 

What should you do?
Investors may want to sit back and see if management can turn things around. Target needs to work on making itself more price competitive in Canada. Moreover, Target needs to get creative and work diligently on gaining back the trust of its consumers. This represents a difficult task. Target's customers may never hold the same level of trust as before the data breach. Only time will tell.

Here's a viable long-term investment
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

William Bias 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information