Source: Wikimedia Commons
As you might already know, Target (TGT 1.99%) lowered its fourth-quarter comps (same-store sales) expectation from flat to negative 2.5% year over year. This primarily stems from the massive data breach it suffered. Up until the point of the data breach, comps had been up 1% and were outperforming expectations. Given this change, what does the future hold? Perhaps consumers hold the answer.
Retailer failure
Target's stock price has declined 9.8% over the past month. Over the same time frame, Wal-Mart Stores (WMT +0.00%) and Costco Wholesale (COST 0.40%) have suffered stock depreciations of 6.5% and 3%, respectively. Wal-Mart just released fourth-quarter numbers that didn't impress (more on this soon), and the Costco sell-off is somewhat of a mystery.
Whatever the case may be, all three retailers are not living up to expectations (at least from a stock performance standpoint.) It's difficult to tell if Target is really suffering, or if it's underperformance is more about retailer weakness and data breach perception. A recent poll conducted by the Star Tribune in Minnesota might provide an important clue.
Consumer reaction
This poll consisted of 800 Minnesota adults being asked a few questions about Target. While this is a small sampling, it's one of the few consumer polls relating to the Target data breach.
|
Poll |
Percentage of Consumers |
|---|---|
|
Won't Change Target Shopping Habits |
82% |
|
Will Shop Less Often at Target |
11% |
|
Will Never Shop at Target Again |
5% |
If you look at these numbers at a glance, then they seem to be OK. On the other hand, if you take away 5% of any retailer's customers, it's going to have a significant impact on both the top and bottom lines. Poor top-line performance has a tendency to lead to increased costs, which then further impacts the bottom line. It's a vicious cycle, and it's one that Target might currently find itself in.
Target attempted to please customers by offering an apology, a 10% discount (as a limited-time offer that has since ended), and free credit monitoring and identity theft protection for one year. How do you think consumers took to these offerings?
|
Poll |
Percentage of Consumers |
|---|---|
|
Very Satisfied |
25% |
|
Satisfied |
50% (approximately) |
|
Not Satisfied |
15% |
Any missing percentages in any of these polls likely means "no response." As far as the results go, they're average (clearly.)
Target waited four days to release the news of the data breach to the public. This aggravated many customers. While a sampling of 800 people isn't huge, it's better than asking just yourself, family, and friends (unless you're extremely popular.) The chart below indicates how consumers felt about the delayed Target response following the data breach:
|
Poll |
Percentage of Consumers |
|---|---|
|
Acceptable Wait Time |
46% |
|
Too Slow |
42% |
|
Unsure |
12% |
Those numbers aren't good enough. They indicate that consumers felt Target didn't inform them of the data breach soon enough, which is likely going to lead to continued distrust in the retailer for a significant amount of time.
Target adjusts
Target recently reduced its headcount by 475 while also announcing that it will leave 700 positions unfilled. The hardest hit areas were Technology Services and Human Resources. Between the Target data breach, a rough start in Canada, and potential health insurance cost increases, Target had to make a move somewhere.
Clearly, it will take Target a long time to improve its reputation and win back the trust of its customers. Therefore, now isn't likely to be the best time to invest in Target. Fortunately, the retailer's strategy of targeting middle-income and high-income consumers looking for bargains in a spacious and comfortable atmosphere has been a success. A recovery down the road is likely, but that could be a while from now.
You might immediately look at Wal-Mart as an alternative investment option. Wal-Mart recently reported a domestic comps decline of 0.4%, primarily because low-income consumers are struggling. However, Walmart Neighborhood Market comps increased 5%. Wal-Mart is going to put more capital toward this growth brand, as well as Walmart Express. This should alter Wal-Mart over the long haul, with its supercenters acting as supply chains to smaller format stores (which will keep costs low for the smaller stores.) The point: Wal-Mart should be capable of continuing to return capital to shareholders in the future.
If you're looking for more of a growth play, then you might want to consider Costco. In January, Costco saw comps jumped 4%, with domestic comps climbing 5% and international comps improving 1%. If you look at the bigger picture, as in the 22 weeks ending Feb. 2, comps grew at a 3% clip with domestic and international comps increasing 4% and 1%.
The Foolish takeaway
Based on Target's lowered projections, a recent consumer poll, and likely future increased costs to help fix the problems created by the data breach, Target's woes are far from over. As an investor, you never want to fight against a current trend by attempting to pick a bottom. Please do your own research prior to making any investment decisions.
