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



Does Target's Surprise Announcement Signal an Imminent Turnaround?

Seattle CityTarget

Source: Target website

Discount retailer Target (NYSE: TGT  ) can't seem to get much right lately. Its major growth initiative in Canada hasn't panned out. Put simply, the expansion into our neighbor to the north has proved to be more costly than management anticipated.

In addition, Target's domestic operations were thrown into chaos when the company revealed a massive hacking breach. It announced that tens of millions of shoppers had their personal data stolen over the holiday shopping season.

These setbacks have impaired Target's brand image and connection with consumers. This is now having a ripple effect on earnings. Target's sales and profits are suffering mightily, which is especially concerning since the operating climate for discount retail is actually quite favorable. This can be seen in strong results from close competitor Costco Wholesale (NASDAQ: COST  ) .

But at the same time, Target management sees a light at the end of the tunnel. It believes its Canadian venture is on the verge of a turnaround and that the effects of the security breach will fade with time.

Target's board of directors just surprised everyone by announcing a whopping 21% dividend increase. Dividends are historically a high percentage of a stock's total return. According to research from BNY Mellon, dividends accounted for more than half of the S&P 500's total return since 1926. Target management struck a tone of confidence during its last quarterly conference call, stating it would have enough future cash flow to continue growing the business and reward shareholders with a significant dividend increase. If Target's huge dividend raise is any indication of the future, the company may have a real turnaround under way.

This retailer misses the target
Target's earnings reports over the past several months have been weak, to put it mildly. The major culprits have been the struggling expansion in Canada and the fallout from the data breach.

Target's Canadian operations generated $1.3 billion in sales last year, but soaring costs resulted in a $941 million loss in terms of earnings before interest and taxes. Target's Canada segment reduced the company's profits by $1.13 per share. Things didn't get much better in the first quarter of this year. Target's loss in Canada increased to $211 million year over year.

Overall, Target was profitable last quarter, but earnings are going in the wrong direction due to lagging sales. Comparable sales, which measure sales at locations open at least one year, declined by 0.3% in the first quarter. Earnings per share dropped nearly 14%. Escalating costs in its Canada segment and the damage incurred from the data breach are clearly taking their toll.

By contrast, Costco has done very well, which is what you'd expect to see given the fact that consumer spending has been buoyant. Excluding the impact of currency effects and gas prices, Costco's total same-store sales increased 5% in the most recent quarter and over the past nine months. That's why Costco is doing relatively well compared to Target, as its EBIT is up 1.4% year to date.

What Target's big dividend increase says
Despite all these headwinds, Target management doesn't seem fazed at all. This is evident because the board of directors just increased the dividend by a massive 21%. Judging by this alone, you wouldn't think the company was at all worried about its current state or its future prospects.

Indeed, there's reason for optimism. Target still has a well-known brand, and with time it's likely the damage from the security breach will fade. Plus, the overall economic environment is one in which consumers continue to closely monitor their spending habits. The unspectacular economic recovery means people are still flocking to discount retailers. That's why Target is still solidly profitable. In addition, Target's CEO John Mulligan stated last quarter that there were early signs of improvement in its Canadian operations.

Foolish Takeaway
The company still expects adjusted profits of $3.75 per share this year, at the midpoint of its 2014 forecast, so there's no reason for panic. In fact, that provides more than enough financial cushion to increase its dividend since Target's payout ratio stood at just 39% of last year's adjusted earnings.

The bottom line is that while Target's turnaround isn't guaranteed, it stands to reason management sees a recovery ahead based on its huge dividend increase. Investors now receive a very attractive 3.6% yield. It appears Target has something to offer both value and income investors alike.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.


Read/Post Comments (0) | Recommend This Article (1)

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: 3000763, ~/Articles/ArticleHandler.aspx, 9/4/2015 2:13:25 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...

Bob Ciura

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.

Today's Market

updated 4 hours ago Sponsored by:
DOW 16,374.76 23.38 0.14%
S&P 500 1,951.13 2.27 0.12%
NASD 4,733.50 -16.48 -0.35%

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

9/3/2015 4:00 PM
COST $140.48 Up +0.06 +0.04%
Costco Wholesale CAPS Rating: *****
TGT $77.45 Up +0.40 +0.52%
Target CAPS Rating: ****