TGT Earnings: Another Lousy Quarter Makes Target Stock a Buy

by Dan Burrows | May 21, 2014 10:55 am

Target (TGT[1]) can’t seem to do anything right. Reeling from last year’s disastrous data breach and foundering Canadian operations, expectations for TGT’s quarterly results were so low the retailer should have have tripped over them.

target, tgt, target stock, tgt stock[2]Instead, Target missed Wall Street’s projections and cut its outlook. There could be tremendous value in TGT stock after this latest bad news, but if there is, it won’t be evident for a long time.

Magnifying matters is that TGT and Target stock are suffering from the same weak economic environment weighing on pretty much all retailers. Too many would-be customers are still out of work. Most of the job growth we have seen is low-paid employment without benefits. Those that do have jobs haven’t gotten raises in ages. And no one feels secure.

Lower- and middle-income consumers are being especially careful with their discretionary dollars even though the recession ended almost five years ago. That’s why companies ranging from Walmart (WMT[3]) to Macy’s (M[4]) to McDonald’s (MCD[5]) had such disappointing quarters, especially in the U.S.

TGT, of course, was already severely wounded from last year’s data fiasco, in which hackers broke in and stole information connected to tens of millions of credit and debit cards. Additionally, TGT’s aggressive expansion into Canada has been bleeding red ink. Call it a triple-whammy.

Target stock has been getting jerked around ever since. TGT is off 9% since it disclosed the data breach and down 11% for the year-to-date so far. Target stock rallied several times since plunging on the hacking news, but it can’t string together enough catalysts to maintain those gains.

Target Stock: A Beaten-Down Buy?

That makes the TGT earnings miss extra disappointing. After all, if there was one thing to look forward to in the Target earnings report, it was that the market expected so little after such a bad Q4.

And still investors overestimated TGT.

Target earnings fell 16% to $418 million, or 66 cents per share, from 78 cents per share a year earlier. On an adjusted basis — which excludes costs related to the data breach among other items — Target earnings were 70 cents per share. But analysts polled by Thomson Reuters were modeling earnings of 71 cents.

Revenue did increase, by 2% to $17.05 billion, which was in line with Street estimates, but the top line was driven by markdowns, and that caused margins to contract — a pyrrhic victory.

The big costs in the Target earnings report were for the data breach and the Canadian operations — but the macro backdrop isn’t helping either. TGT reported is sixth consecutive quarter of lower traffic to its stores. Ominously, that sluggishness has been present since well before the hacking.

Lower-priced retailers are also struggling, so it’s not like TGT customers are trading down. They’re just not shopping as much. Retail sales rose only 0.1% last month.

For anyone interested in Target stock, this could be just the entry point they’re looking for. As hard as it is to pull the trigger when a company is awash in bad news, that’s usually the time to buy low. BP (BP[6]) stock during the Gulf oil spill or JPMorgan Chase (JPM[7]) stock amid the London Whale catastrophe were excellent times to buy.

Target stock wants to come back. Target stock has put together four decent runs this year, only to give back the gains. At just 12 times forward earnings, Target stock is too cheap and tempting for value investors to ignore.

It’s going to take a long time for TGT to clean up this mess. Perhaps even longer before retail sales perk up. But TGT is still the nation’s third-largest retailer. Target stock looks sufficiently beaten down to discount the wreckage.

There’s blood in the streets, which means now is the best time to buy Target stock.

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

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