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Target Slumps to Strong Sell on Preliminary Q2 Guidance Cut - Analyst Blog

On Aug 7, 2014, Zacks Investment Research downgraded Target Corp. ( TGT ), the general merchandise retailer, to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Estimates for Target have shown a downtrend since the company made a few preliminary announcements on its second-quarter 2014 results, including recording higher expenses and lowering its earnings per share outlook.

Management announced that owing to the data breach experienced by Target late last year, the company expects to record gross expenses of $148 million in second-quarter 2014. However, it anticipates receiving partial relief on account of insurance receivables worth $38 million.

As per sources, the company has been recording significant costs ever since its computer systems got hacked and its customers' credit card information was stolen in Dec 2013. The company has been attributing a part of its breach-related expenses to consulting, legal and credit monitoring services.

Moreover, the company made a $1 billion payment as an early debt retirement in the second quarter, which resulted in a pre-tax loss of $285 million. This will be noted as net interest expense in second-quarter 2014.

Following the ongoing impact of its data breach and the aforementioned predictions, Target lowered its earnings per share outlook for the second quarter. It now projects adjusted earnings to be roughly 78 cents a share, as compared to a range of 85 cents to $1.00 forecast earlier.

The adjusted earnings guidance was lowered as management now expects flat same-store sales at the company's U.S. segment, coupled with earnings before interest, taxes, depreciation and amortization (EBITDA) margin coming in at a lower-than-expected rate. Also, management anticipates sales to remain soft at the company's Canadian segment as the breach has shaken consumer confidence, resulting in lesser footfall and a public relations nightmare for the company.

This trimmed guidance triggered a downtrend in the Zacks Consensus Estimate, as analysts became less constructive on the stock's future performance. This is evident from the movement witnessed in the Zacks Consensus Estimate that fell 5.2% to $3.49 for 2014 and roughly 3% to $4.14 for 2015 in the past 7 days.

Apart from security infringement, a tepid entry in the Canadian market, weak e-commerce sales and the subsequent dismal quarterly performances have also been a setback for the company, making it difficult to compete with giants like Family Dollar Stores Inc. ( FDO ) and Dollar General Corporation ( DG ).

However, with Brian Cornell being elected as the next Chief Executive Officer (CEO) and Chairman, management is hopeful of battling near-term headwinds. It is focused on undertaking initiatives to drive consumer traffic, and transform into a leading omnichannel retailer.

Other Stocks to Consider

A stock in the same industry that looks promising and is expected to continue with its upbeat performance is Burlington Stores, Inc. ( BURL ) with a Zacks Rank #1 (Strong Buy).

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FAMILY DOLLAR (FDO): Free Stock Analysis Report

DOLLAR GENERAL (DG): Free Stock Analysis Report

TARGET CORP (TGT): Free Stock Analysis Report

BURLINGTON STRS (BURL): Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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