Should You Buy Target Stock? 3 Pros, 3 Cons

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Target (TGT) shares were up a couple percentage points Tuesday after releasing second-quarter earnings — though that’s little conversation for TGT stock holders, which have seen their investment fall by double digits in the past year.

target, tgt, target stock, tgt stockTarget’s woes, much of which have been the retailer’s own undoing, have been well documented and have only exacerbated the external pressures of a slow economic recovery and value-conscious consumer.

But change is in the air. There’s a new chief executive in place, and green shoots of comps growth in the past six weeks could be a signal that the retailer is back on track.

So has TGT stock finally hit bottom, or should those looking to buy the dip wait for a little more dip? We look at the pros and cons of Target shares to find out.

Target Stock Pros

A Target ‘Pro’: Brian Cornell, retail veteran and Target’s new chief, is a hopeful “pro” for the discount retailer. His resume includes a stint as head of PepsiCo’s (PEP) North American snacks business (its best arm), in addition to leadership spots at at rival Walmart’s (WMT) Sam’s Club and Michaels Companies (MIK). At Target, Cornell will be focused on streamlining the shopper experience. He is focused on accelerating the omnimedia initiative to bring a more integrated experience across customer channels — retail, mobile and online. If Cornell is successful, Target could see results that rival those of department store retailer Macy’s (M), which was a pioneer in adopting the omnichannel experience (and whose shares are up more than 33% in the past year).

Extended Hours: Target revealed in recent days that it would be extending its hours of operation by one hour at about half of its retail locations, which will keep the doors open until midnight at select locations. It’s a competitive move — one that mimics Walmart’s policy and one that retailers typically reserve for closer to the holidays to drum up foot traffic and sales — both of which Target needs.

Signs of Progress: Target execs have observed an improvement in comps over the past six weeks, evidenced by a 1% increase in July comparable-store sales. Back-to-school sales have been a key driver of these results despite the company’s shift in strategy to ditch aggressive discounting efforts (after promotions led to a 100-basis-point decline in Q2 U.S. gross margin). The sales momentum is proof that customers are more focused on merchandise and the “event” of school shopping than they are on deals, as noted by company execs on the call.

Target Stock Cons

Second-Quarter Performance: The most positive thing relating to Target’s second quarter was the lively music leading up to Wednesday morning’s earnings conference call. After that, it was all downhill. Q2 earnings (excluding items) came to 78 cents per share, 60% lower year-over-year and a penny shy of Wall Street estimates. Unadjusted earnings came to 37 cents per share. The impact of the data breach was worse than originally thought, and that’s going to continue to hurt Target’s results for the foreseeable future. And while revenue was a “pro,” U.S. comps were not, coming in flat with last year’s second quarter amid a heavy promotional environment. TGT lowered its full-year profit outlook significantly, from $3.60 to $3.90 previously to a new range of $3.10 per $3.30. And there’s not much of a catalyst for the remainder of 2014.

Scandal: Nearly a year later, and we’re still talking about the data breach at Target. Worse, the retailer still is being blindsided by the impact of the hacking activity, evidenced by its breach-induced expenses in the quarter of $148 million. This is not only affecting profits but also the company’s ability to return value to shareholders. Uncertainty tied to the data breach prevented the company from buying back shares in Q2, and that trend will continue into Q3 — a no-no when trying to woo investors.

Canada: Canada remains a weak spot for Target, evidenced by the 11.4% decline in Canadian same-store sales for Q2. The retailer has battled an aggressive discounting environment and excess inventories. Incidentally, luxury retailer Nordstrom (JWN) recently revealed it would enter Calgary this fall with half a dozen locations. Perhaps it learned from Target’s mistakes. Target entered the country aggressively last year and is on target for more than 130 locations by year-end.

Bottom Line

Target stock is not a 2014 story. At least not for the bulls. There are more headwinds yet ahead, evidenced by the lowered profit guidance and “one step forward, two steps back” progress in Canada.

The positive anecdotal evidence from July and August offers investors a glimmer of hope that there could be recovery in same-store sales on the horizon. But Target’s not out of the woods, and it’s premature to say if TGT has bottomed.

So should you buy Target stock? No — for now, the cons outweigh the pros. Remain on the sidelines until there’s a clearer path toward growth at Target.

As of this writing, Gerelyn Terzo did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/08/target-stock-tgt-pros-cons/.

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