Target Corp. shares have fallen 10 percent but are poised for a comeback

A guest service station at a Target store on South State Street in Chicago. Shelby Livingston/MEDILL
A guest service station at a Target store on South State Street in Chicago. Shelby Livingston/MEDILL

Complete overhauls in management, blows to its reputation, and difficulty expanding into Canada have depressed Target Corp.’s share price this year, but perhaps by too much.

The Minneapolis-based discount retailer is slowly bouncing back from a holiday data breach last year. Management says customers are returning to Target stores, and first quarter sales of U.S. stores open at least one year decreased 0.3 percent, an improvement from the post-breach sales trends Target was enduring, said John Mulligan, the interim chief executive officer.   Same store sales of U.S. stores decreased 2.5 percent during the fourth quarter of 2013.

Uncertainty in Target’s future has scared investors away, but analysts say the company is clearly setting up for a comeback.

“We see the shares as undervalued at current levels,” said Morningstar Inc. retail analyst Ken Perkins in a May 27 note.  His fair value estimate is $65 per share.

Target Corp.’s stock has dropped 10 percent from $63.18 to $57.24 this year so far, and has decreased 19 percent from $70.00 a year ago.  In comparison, Wal-Mart Stores Inc.’s stock decreased 3.4 percent to $76.24 from $78.91  year-to-date, and decreased 1.3 percent from $75.25 a year ago.

“One of the things weighing on the shares is the concern about the Canada market, and [Target has] really struggled there,” Perkins said in an interview.  “And they got rid of their CEO this year.  There’s uncertainty with who is going to take the lead.”

Target’s initial entry into Canada resulted in nearly $1 billion in losses, but first quarter earnings suggest tides are turning. Sales at Canadian stores nearly quadrupled to $393 million during the first quarter, compared with $86 million in the same period a year ago. Though analysts don’t expect Canada to contribute heavily to the company’s bottom line for at least another year, many agree the potential for growth is there.

In recent weeks, Target has cleaned house, citing a need to transform the company. Investors are worried about the lack of strong leadership in the meantime.  Longtime Chief Executive Officer Gregg Steinhafel resigned in May, and Chief Financial Officer John Mulligan took his place as interim chief.  The search is on for a permanent replacement.

Target also ousted the president of Target Canada, Tony Fisher, in favor of the senior vice president of merchandise, Mark Schindele.

Management is focused on cornering the digital market, which analysts at Janney Montgomery Scott LLC called “a long overdue decision,” in a research note.

Target executives created a digital advisory council to lead the charge online, and Target is testing a same-day delivery service in Minneapolis, Boston and Miami markets this month to catch up with Amazon, Google and other online retailers who have already entered the battle for fast delivery.  Target is also focused on growing mobile sales, which make up two-thirds of the company’s total online sales.

Target has the highest dividend yield in the discount retail industry at 3 percent, paying out 43 cents quarterly. Target’s trailing price-to-earnings ratio is 16.82, lower than the Standard & Poor’s 500 Index p/e of 18.50, but higher than competitors Kohl’s Corp., with a p/e of 13.19, Macy’s Inc., with a p/e of 14.16, and Wal-Mart Stores Inc., with a p/e of 15.81.

Analysts expect second quarter earnings per share to increase to 91 cents per share from 70 cents per share this quarter.

“It seems that business is going to turn around,” Perkins said.  “We’re just not sure when.”

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