Why Target Corp. (NYSE: TGT) Is a Buy, Despite Bad Earnings

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TARGET
NYSE: TGT
Dec 19
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Price: 73.95 | Ch: -0.69 (-0.9%)

Target Corp. (NYSE: TGT) reported extremely weak Q4 2013 earnings Wednesday morning, but the numbers were no surprise to investors, who were well aware of Target's recent run-in with a massive data breach and the winter months' challenging retail environment.

Still, between earnings that beat Wall Street estimates by a penny and a depressed stock value that makes for a discount buy, TGT shares rose $0.99 to $57.50 in premarket trading. Target stock is up 4.76% to $59.20 per share as of 10:25 a.m. EST.

UPDATE: Target stock gained a total of $3.90 (7.04%) by close today on earnings news, and now sits at $60.49 per share.

TGT reported a whopping 46% loss on net profit compared to the same period a year before, at $520 million.

The company beat Wall Street with fourth-quarter earnings per share (EPS) of $0.81 per share ($0.01 above Wall Street estimates) on revenue of $21.52 million. That puts revenue down 5.3% compared to the same period last year.

For the full fiscal year 2013 ending in February, revenue came in at $72.57 million, a 1% drop from the same period last year, and slightly below Street estimates of $72.64 million in revenue.

Both quarterly and full-year estimates have slipped in the past couple of months. On Jan. 10, Target Corp. itself cut its fourth-quarter guidance by $0.30 per share to a range of $1.20 to $1.30 per share. It forecasted holiday sales to fall 2.5% compared to the same quarter a year ago and comparable sales to drop 2% to 6% for the rest of Q4.

For the full year outlook, Target expects EPS to range between $3.85 and $4.15, while analysts had expected $4.21.

TGT's fourth quarter got slammed by two unfortunate developments, but long term, its stock still looks good.

Here's the story.

Note: The $65 billion cybersecurity industry is poised for a boom – experts predict a 39% increase in corporate spending alone by 2017. Here are the best cybersecurity stocks to buy now.

What Depressed Target (NYSE: TGT) Earnings

TGT Earnings Factor No. 1: Target Corp.'s Cybersecurity Woes

On Dec. 19, the retail giant announced a cybersecurity breach that included payment data for around 40 million customers who had used credit or debit cards at their stores between Nov. 27 and Dec. 15.

A few weeks later on Jan. 13, Target amended upward the number of those affected by 70 million, for a total of 110 million customers impacted overall. It also announced the breach included home addresses, email addresses, names, and phone numbers for the additional 70 million.

"During the first half of the fourth quarter, our guest-focused holiday merchandising and marketing plans drove better-than-expected sales," Target chief executive Gregg Steinhafel said at earnings release today. "However, results softened meaningfully following our December announcement of a data breach."

The breach resulted in $17 million in net expenses in the fourth quarter, with $61 million of total expenses partially offset by $44 million in insurance receivable. Sales in the quarter fell 3.8%. Target has said that its sales were stronger than expected before the breach occurred and confirmed numbers "have improved in recent weeks."

In its earnings guidance for the next fiscal year, the company warned it could not estimate the breach's future costs, including litigation, fraud claims, and investigative fees.

"These costs may have a material adverse effect on Target's results of operations," the company stated.

TGT Earnings Factor No. 2: Low U.S. Retail Sales

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