Monday, January 27, 2014

Target Seen Losing Customers in Wake of Card Data Breach- 12/30/2013


  1. Company overview:
    Target is a retail store chain with 1,919 stores in total as of Dec 19, 2013. 1,797 in the US, 122 in Canada, also distributes through Stock price is currently 62.37 with a 52 week range 58-73.5
    3Q13 with 3Q12 comparison:
    Total Rev in 3Q13 is 17.3B up by 1.9% from 2012, COGS up by 4.9%, Earnings is 341M down by 40% from 2012, EPS .54 down 44.4% from .97 in 2012.
    Ratios (US segments): Gross margin 30%, down .3%; EBIT margin 5.8%, down .8%.
    Rev/employee 204,000 higher than the industry average of 173,000, but Income/employee is lower 6681 comparing to 7,078.
    3Q FCF 644M down from 879M in 2Q
    REDCard (Target issued Debit and Credit cards) Penetration 19.9% up 5.9% from 2012.

    1. Credit and debit card information breach: hurt sales in the most important Christmas shopping season, also damages REDCard market penetration.
    2. Litigation costs $680 million according to Reuters (which is $1/share) and security infrastructure investment---decrease FCF in the upcoming years.
    3. Expansion in Canada segment dragged earnings, it will improve over time.
    4. development will improve margin ratios due to lower costs.

    Conclusion (Hold):
    Short-term financial performance will worsen, but there is nothing related to the operations of the company. It will recover within 1-3 years. Stock price remained stable with a support level of $60.

  2. 3 major reportable segments:
    • U.S. Retail: 98.2% of total revenue in 2012, 90% of profit in 2012
    • U.S. Credit Card: 1.8% of the total revenue in 2012, 10% of profit in 2012
    • Canadian not reported in 10k.

    Sales by Product Category:
    • Household essentials 25%
    • Hardlines 18%
    • Apparel and accessories 19%
    • Food and pet supplies 20%
    • Home furnishings and décor 18%

    Free cash flow to the firm:
    2012: 2336m, 2011:251m, 2010:3,524m

    • Wide product and brand portfolio
    • Operational network
    • Partnership with Zellers Inc. to purchase leasehold in Canada to open stores
    • Product Expansion Initiatives: Wired, Debit Card and the target RBC MasterCard
    • Great opportunity for TGT: E-Retail

    • Patent infringements:
    • Substantial debt burden: debt to equity ratio is 110.3%, debt to capital ratio stood at 0.53%
    • Product recall: lose customers in the future.
    • Competitive Market: Best Buy, Costco, The Kroger Co., Sears, Walgreens and Walmart

  3. Target: the second-largest discount retailer in the United States

    Total revenue in 2012: 73 billion, 4.9% growth in 2012, 3.0% 5-year CAGR
    Two segments:
    -Retail sales: 72 billion, 98% of total revenue
    Health, beauty & household essentials: 25%
    Hardlines: 18%
    Apparel & accessories: 19%
    Food & Pet supplies: 20%
    Home furnishing: 18%
    -Credit card sales: 2% of total revenue

    Based on 2013 data:
    -Total revenues: 2.0% increased in Q3 2013, 1% increased from Jan to Sept 2013
    -Operating income: 40% declined in Q3, 12% declined 9 months ended. US segment: 11.4% declined in Q3, 5.9% declined 9 months ended
    -Operating income margin: 4.1% in Q3 2013, while 7% in Q3 2012, 6% 9 months ended in 2013, while 7% in 2012
    -EPS: 44% declined in Q3, 26% declined 9 months ended
    -ROE: 2.1% in Q3 2013 while 3.9% in Q3 2012
    -Free cash flow: 1B in Q4 2012, 2.3B in Q1 2013, -132M in Q2 2013. Wal-mart: 5.2B in first half of 2013

    -Entered Canada in 2013: opened 124 stores by the end of 2013. 2% of total revenues in Q3 2013 and still in loss due to start-up costs.
    -Online sales: Target did not launch its online website until 2011 and the Internet sales represent an immaterial amount of total sales.

  4. Target receives revenue from Discount Retailer Store and its branded Credit Cards. Discount Retail Store is 98% of the revenue, while credit card is only 2%. The Retail Segment includes all of its merchandising operations. The company offers both everyday essentials and fashionable, differentiated merchandise at discounted prices. The Credit Card Segment offers credit to qualified guests through its proprietary credit cards and the Target Visa. The company is entering Canadian market. Through 2012, all of over 1,700 Target’s stores were located in the United States, while the company is on the way to have 124 stores across Canada by year’s end.
    Target falls under a sub-industry within Consumer Staples sector called Mass merchants. Competing in this space is also Walmart. One of the industry trend of boosting revenue has been increase percentage of food consumables in total sales, essentially winning market shares from food retailers such as Kroger and Safeway. Target has been slow in adopting the industry strategy, with only 19% of the sales as food/consumables, compared with Walmart of 55%. Mass merchants compete aggressively on price to drive traffic. During times of economic stress, pricing becomes increasingly important to attract value-conscious shoppers. Walmart’s prices have been below Target's in 30 of the past 37 months.
    Target generated almost 3 billion free cash flow in the twelve month ending 11/2, making it well-positioned expanding into Canada. The company has done OK in public relations, communicating effectively with its customers and regulation bodies. Experts say that this incident is not unique; very often credit card data breaches are not discovered. The current technology that works with credit cards is not secure enough that we have to live with the status quo until the industry adopts smart chip technology, which has been used for years in many countries in Europe and China. I think the cyber security breach would likely have only short-term impact on the company.