Target Corporation (TGT) stock popped early Wednesday after the discount retailer reported a surprise third-quarter profit that exceeded analysts’ average estimate. If nothing else, the better-than-expected results should help put last year’s catastrophic data breach behind Target stock once and for all.
Target stock only recently regained levels last seen a year ago when a massive hacking of customers’ credit- and debit-card data scared shoppers away and added heavy costs to Target earnings.
Indeed, over the last year, Target stock is up just 1.3%, lagging the broader market’s 15% gain.
Still, it’s a welcome comeback for TGT stock after the data breach conspired with so-so holiday sales, stumbling Canadian operations and a generally tepid environment for consumer spending last year.
Heck, shoppers have become so tight with their disposable income that even dollar stores can’t generate enough traffic to justify their large store bases. Consumer discretionary shares like Target stock are lagging the broader market by a wide margin this year.
That may be starting to turn, however. TGT’s main rival Wal-Mart Stores Inc. (WMT) reported better-than-expected third-quarter sales earlier in this earnings season.
The positive surprise should also give the market confidence that the new CEO’s turnaround plan is working. After all, Target’s woes predated the data breach, with a couple of years of declining store traffic.
A lack of new products and merchandising missteps were mostly to blame, a loss of some sales to online retailers hurt TGT too.
Target Stock on the Comeback Trail
Target earnings rose rose 3.1% for the quarter, helped by strong back-to-school and Halloween sales, as the bottom line rose to $352 million, or 55 cents a share, up from $341 million, or 54 cents a share, a year ago. On an adjusted basis, which is what Wall Street typically looks at, earnings fell from 56 cents last year to 54 cents to beat analysts’ average estimate by 7 cents a share.
In more good news for Target stock, sales likewise exceeded estimates, rising 2.8% to $17.73 billion a year earlier. The Street was looking for TGT revenue to hit $17.56 billion. Furthermore, same-store sales — a critical measure of a retailer’s health — rose 1.2% in the U.S., and 1.6% in Canada. The same-store sales growth couldn’t keep margins from retracting, however, as Target leaned heavily on promotions to drive sales in the quarter.
Margin contraction was widely expected, however, as the company told the Street it was coming at the beginning of the year, so it shouldn’t weigh on Target stock.
The cost of the data breach are hardly behind the company too. Target spent another $12 million in the quarter for breach-related expenses. Yes, insurance helped soften the blow, but the breach has cost Target nearly $250 million and counting and counting.
It’s still early in the turnaround and Target stock isn’t really discounted enough to make it a red-hot bargain, but the latest Target earnings do suggest more upside ahead. If the holiday shopping season delivers as expected, the data breach and years of uninspiring merchandise selection will soon be forgotten.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
