Why Target’s New Comments Should Worry Investors

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NEW YORK (TheStreet) -- On Tuesday, a mere six days removed from announcing former Pepsi (PEP) and Walmart (WMT) executive Brian Cornell as its first outside chairman and chief executive officer, Target (TGT) issued another earnings warning.

The latest dreary commentary from the Minneapolis-located retailer should frighten its investor base for one huge reason: The business had already been underperforming management's expectations.

Citing $148 million in gross expenses to increase the accrual for estimated probable losses related to the December 2013 data breach, a $285 million pre-tax loss (or 27 cents per share) for a debt retirement and softer than expected U.S. and Canadian sales, Target guided its GAAP second-quarter earnings per share to 41 cents lower than its non-GAAP figures. Target took down its second-quarter non-GAAP earnings per share guidance to 78 cents per share from the 85 cents to $1 per share conveyed on May 21.

According to Yahoo Finance estimates, Wall Street had been looking for second-quarter earnings per share of 91 cents on sales of $14.74 billion.

No negative revisions to the full-year guidance of $3.60 to $3.90 (already reduced by 25 cents per share from a prior plan on the first quarter earnings call) were articulated, but that is likely lurking in the weeds for when the company announces its second-quarter earnings on Aug. 20.

Ultimately, it's the revised non-GAAP earnings guidance, which captures the very core performance of the business, that should be of worry to Target investors.

Target's operations in both the U.S. and Canada are essentially underwhelming its own cautious view, and the new commentary is highly inconsistent with what was offered from interim chief executive officer John Mulligan and chief merchandising and supply chain officer Kathryn Tesija on May 21. At the time, Target suggested to investors that the U.S. business was beginning to turn the corner from the holiday data breach amid investments in promotions ad marketing, while Canada was on the mend as excess inventory was cleared through aggressive discounts and supply chain hiccups were being corrected.

The latest developments from Target and the stock's 4.4% decline on Tuesday's session hint that the market is still trying to properly value a business that is now consistently underperforming guidance. In light of the lagging nature of Target's fundamentals and the material overhang of a data breach payout, there is reason to believe the company's stock price faces significant risks in the months ahead. First, the share repurchase plan could continue to be halted; second, a dividend payout could be reduced; and third, the company's credit rating could be lowered again.

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