The situation has deteriorated at Target. On Friday, the retailer announced an update to its investigation of the recent credit/debit card data breach, first made public December 19. The firm has learned that not only has the payment card data of individuals been stolen, but also certain guest information including names, mailing addresses, phone numbers or email addresses for up to 70 million individuals (was 40 million). Target is doing what it can to keep customers happy, including guaranteeing zero liability for the cost of any fraudulent chargers arising from the breach and offering one year of free credit monitoring and identity theft protection to all guests that shopped at US stores.
Still, the good faith efforts by Target haven’t been enough. In the same press release, the company provided an update to expected fourth-quarter 2013 financial results. In the US segment, Target now expects fourth-quarter adjusted earnings per share of $1.20-$1.30, compared with prior guidance of $1.50-$1.60 per share, a fairly drastic revision. The firm now expects a comparable sales decline of approximately 2.5%, compared with previous expectations of flat sales. The credit card breach is having an impact on customer confidence, as stronger-than-expected fourth-quarter sales prior to the announcement have been replaced with meaningful weaker sales, which are expected to decline at a 2%-6% pace for the remainder of the quarter.
Though we acknowledge that Target’s credit card nightmare continues, the firm is doing all that it can to minimize financial damage to protect its brand image, which has undoubtedly been harmed. We do, however, expect a full recovery by the retailer and are viewing the security breach as a very unfortunate hiccup that has inconvenienced millions of its customers. We think customers will return.
Valuentum’s Take
The bigger issue at Target, in our view is its venture into Canada, which we point to as a fundamental factor pressuring earnings as opposed to credit-card breach related factors, which we classify as an extraordinary item. Perhaps needless to say, the firm is not executing presently at a level that we would like, but we do think the firm will recover nicely as customers come back to the retail giant. Still, we’re not fans of either Target’s valuation upside potential or the health of its dividend (see corresponding reports). Our best ideas are included in the Best Ideas portfolio and Dividend Growth portfolio.