Target Stores Fourth Quarter Insider Analysis

Shares of Target Stores (NYSE:TGT) closed up 7% on Wednesday after the discount retailer reported Q4 2013 adjusted EPS of $0.90, above its prior outlook and the street’s forecasts. Given bearish sentiment on the name, investors were likely relieved the company did not miss, even though earnings were up against a lower bar.

The bulls also pointed to traction on the US side while earnings dilution in Canada was not as bad as expected. Adjusted earnings can be broken down into $1.30 from the US offset by dilution in Canada of ($0.40). Worth noting, investors are still attempting to quantify the magnitude of the losses associated with its 2013 credit card breach.

On the margin, Target posted a fairly sizable beat, $0.90 versus the street at $0.79. However, analyst numbers were likely not comparable on an apples-to-apples basis given inconsistent accounting in financial models. Putting this into perspective, results in US include $0.06 for “other items” but exclude $0.09 of net charges such as severance and a shift in “part-time team member health benefit changes.” The latter could be justified as operating line items, and thus should be included.

It is also unclear if lower depreciation and amortization (D&A) from the statement of cash flows was the reason dilution was less than expected. If this is the case, this could be interpreted as financial engineering and a negative signal. TGT guided to 2014 EPS of $3.85-$4.15, which is at the mid point of the Street’s estimate of $4.00. Note that this bakes in Q1 guidance of $0.60-$0.75, below consensus by $0.10. In the US, traffic was lackluster, although this was offset by higher ticket prices.

Same-store-sales were in line and met management’s prior forecast in January. By comparison, sales in Canada were well below estimates and gross margin for the region was 4.4%, 400 bps below the street. Lower expenses helped Target meet its operating income target.

Target has underperformed the S&P by -11% year-to-date, although valuation seems fair, and not especially compelling at these levels.

The stock currently trades at 7x forward enterprise value (EV)/earnings before interest taxes depreciation (EBITDA) of 8x and 14x on P/E, respectively. This is in line with its 5 year forward multiples on both metrics.


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