TGT – Why Target Stock Could Be Toast

Recent data breach is just one of several headwinds for TGT

By Will Ashworth, InvestorPlace Contributor

Target (TGT) announced on Friday that its credit card breach was even worse than originally reported. On top of the original 40 million customers that had card numbers stolen, up to 70 million people had some of their personal information compromised as well.

target-stock-tgt-stockBut for investors, the question is what the breach and bad publicity mean for Target stock. Since the breach first came to light Dec. 19, TGT stock has basically flatlined at $62.

Is Target stock toast? Let’s take a closer look.

Target Credit Card Hack? Shrug.

The Target credit card breach has already been a huge deal because people freak out whenever their privacy is threatened — especially when the reality of our often-compromised high-tech world is thrown in their faces.

But between social media, endless fraudsters and the many times we are asked to give personal information online, just about everyone is at risk. And if you think Target is the only retailer with this kind of problem, you’ve got your head deeply planted in the sand.

Of course, that doesn’t mean TGT stock will just shrug off the incident. According to the company, fourth-quarter same-store sales declined 2.5% year-over-year vs. an earlier projection that the metric would be flat. It’s safe to assume that many Target customers stayed away in the days leading up to Christmas due to the data breach, and that will most certainly hurt profits short-term.

But looking longer-term, I doubt the credit card hack will weight on Target stock. It certainly didn’t kill TJX Co. (TJX), which announced in January 2007 that 90 million accounts were compromised over a two-year period. That was the largest security breach (at the time) worldwide. TJX stock still finished 2007 slightly higher than where it began, and has been on a tear ever since.

Other Headwinds for TGT

That’s not to say TGT stock is a screaming buy, though. While the credit card breach is newsworthy, the discount retailer has other problems that should worry Target stock holders … like, say, its actual business. As I detailed in August, Target’s Canadian expansion hasn’t been the home-run success most expected. Anything that could go wrong has … and that’s worrisome considering TGT has invested upwards of $3 billion. I figure Target will completely right the ship within two or three years, but that’s still not a guarantee.

In the meantime, all Target stock holders can do is hope that the company ensures its U.S. business remains competitive. So far, though, that hasn’t looked very promising.

For one, a gaint blow came to Target stock back in August. When the company reported second-quarter earnings, the results weren’t disastrous … but CEO Gregg Steinhafel made a concerning comment: “For the balance of the year, our U.S. outlook envisions continued cautious spending by consumers in the face of ongoing household budget pressures,” he said.

Shares of TGT stock have basically moved sideways since.

Then, going into the holiday season, Target projected mediocre revenue. It was actually doing better than expected … until, once again, the data breach hit. Any momentum the company had at that point went out the window. Now, Target expects 2013 earnings to fall 34% to $2.98 per share.

Target stock investors are right to wonder where things are headed next. Personally, I think TGT stock is in a tough spot right now. At this stage in the game, there is almost no news the company can provide that will push Target stock higher, while there’s plenty that can send it down further.

The Outlook for Target Stock

So how should you play Target stock?

If you’re a long-term investor — with a time horizon of, say, three to five years — you might be able to justify a small position in TGT to see where things go. But be prepared: Target stock is definitely in a for a rough ride over the next year.

In fact, I see Target stock as dead money for the next six months unless at least one of the following things happens: Target delivers promising results from its Canadian operations, has lower-than-expected costs dealing with its data breach or releases a substantive restructuring plan that saves the company money in the long-term.

Through the end of the third quarter, Target had negative EBITDA of $452 million in 2013 … thanks largely to its Canadian operations. Until gross margins expand, Canada will remain a drag on overall profitability. Plus, rivals like Macy’s (M) just announced 2,500 layoffs ($100 million annual savings) at a time when business is actually going well. Target, on the other hand, is delivering tepid sales growth, meaning its U.S. cost structure has definitely gotten bloated.

If none of these things happen, though, Target stock will have little reason to move higher.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

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