Target (TGT) has been in the news a lot lately after news that some 40 million credit card numbers have been hacked from the retailer’s database.
The numbers show that TGT was in deep trouble before this security breach became a staple on the nightly news.
Target stock is up just 5% year-to-date in 2013 vs. about 29% gains for the broader market … but even through Thanksgiving (before word of the Target data breach came out), TGT stock was up just 8% vs. 26% gains for the broader market — clear underperformance that shows something else was at work.
Here’s why Target stock had underperformed long before this data breach, and why TGT remains a sell right now regardless of how the situation unfolds:
Sell Target Stock Because of …
Weak Sales: Target needs to beat Wall Street forecasts on revenue simply to tread water with its FY2013 sales. And after reports that holiday sales were tepid leading into the final Christmas Eve push, chances are that even those modest TGT sales targets will not be hit. The lack of revenue growth at Target this year (fiscal 2013) is only the latest top-line challenges; FY2012 sales were up less than 5% year-over-year, and FY2011 sales were up less than 4%. Looking forward to FY2014, forecasts call for a return to growth … but hardly enough to get excited about — only back to that meager 5% rate we saw in prior years.
Weak Profits: Target will finish FY2013 with an earnings per share decline of about 20%. And while forecasts for FY2014 are higher, they still are below FY2012 numbers. The fact that Target has been running under a $5 billion stock repurchase plan since January 2012 makes those EPS figures look even less impressive.
Sluggish Stock: Target has underperformed in 2013 to be sure, but that’s just part of the longer trend — and a longer-term sector trend at that. Since January 2010, TGT stock has added just 32% while the S&P 500 is up twice that. And since 2010, peers like Walmart (WMT), Sears (SHLD) and Kohls (KSS) are all underperformers, too.
With unemployment improving and hopes of a cyclical recovery in 2014, you might think it’s time for Target stock to get moving again. And sure, with a forward P/E of less than 12, TGT stock is more attractively valued than peer Walmart, which trades with a forward earnings multiple of 14.
But there clearly are problems at Target far beyond the recent data breach regarding credit cards.
Sales are sluggish and profits are weak, and ultimatly that is why TGT stock is a sell for 2014.
More on TGT Stock
- Holiday sales haven’t looked so hot lately. (ABC News)
- A timeline of Target’s data breach. (WSJ)
- 5 lessons from the TGT hacking scandal. (CNBC)
- Target’s reputation was already suspect before this security problem. (MarketWatch)
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.