Lock On Target for Retail's Best Bargain

NEW YORK (TheStreet) -- Retail giant Target (TGT) has been in the news for all the wrong reasons. Sure, the entire retail sector has struggled with weak foot traffic as a result of winter storms. But on the heels of the company's data breach, which compromised information from millions of credit card holders, Target's also dealing with lack of consumer confidence.

With the shares down 15% since the hacking incident, some investors believe traders have overreacted. I can't blame them. From Wal-Mart (WMT) to TJX Companies (TJX) who hasn't been breached? And why should this situation be any different from the stolen passwords reported by Facebook (FB) and Microsoft (MSFT)?

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First, let's acknowledge that Target's management never shied away from the scrutiny. The company quickly apologized for the violation and assured customers that they would not be liable for any fraudulent costs incurred from the breach.

The company never downplayed the magnitude of the breach. Nor did they lowball the number of customers believed to have been impacted (an estimated 70 million people). At this point, investors don't know what to make of the stock. While shares have been relatively resilient, it remains to be seen how shoppers will respond in the coming the quarters.

I think that unless you believe this event will have significant long-term effects, these shares present a buying opportunity. This scandal does not change the long-term story. Nor has management altered its strategic plans for 2017.

The company expects earnings of $8 per share over the next three years. It also projects roughly $6 billion in annual revenue from their Canadian operations (where sales have underperformed). So despite this recent scandal, it's encouraging that management chose to not run from its promises, even if the Street would have understood if they did.


Management's main challenge now is to have investors believe when they say sorry. And nothing does this better than reporting strong earnings. Wednesday, Target will have its shot at contrition when it announces fourth-quarter and full-year results.

The Street will be looking for 80 cents in earnings per share on revenue of $21.46 billion, which would represent a year-over-year revenue decline of roughly 6%. These estimates have been revised down slightly since the data breach, placing full-year adjusted earnings in a range of $4.29-$4.39 per share. Given the potential scale of customers affected by the breach, I still see these figures as too aggressive.

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I project fourth-quarter earnings of 74 cents to 78 cents on revenue of $19.8 billion. If full-year EPS comes in anywhere close to $4.30, this should be considered a victory, especially given the impact of winter weather on retail sales. I don't believe Target has been immune.

To the extent there's an upside surprise with projects like Canadian store expansion and the company's CityTarget initiative, patient investors will be rewarded. It will certainly help if management can expand margins, even if that's a tall task, especially given Wal-Mart's recent horrific results.

Target has always proven to be an extraordinarily smart company, holding to its strategy of offering satisfying products at discounted prices, while appealing to shoppers with an appetite for the "upscale high-end" category. These advantages remain. And with the stock currently trading at roughly 13-times cash flow, I don't see a better bargain to today in the retail sector.

At the time of publication, the author held no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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