3 Analysts Weigh In On Target's Pre-Announcement

As one of the first acts as chief executive officer of Target (NYSE: TGT), Brian Cornell pre-announced on Tuesday the company's second quarter results.

Target stated that its expenses in the second quarter related to the December 2013 data breach will gross $148 million which will be partially offset by $38 million in insurance receivables. Target also stated that its U.S. same-store sales are expected to be flat and now expects its earnings per share to be $0.78 versus a prior guidance of $0.85 to $1.00.

In a press release on Tuesday, Target stated “while the environment in both the U.S. and Canada continues to be challenging, and results aren't yet where they need to be, we are making progress in our efforts to drive U.S. traffic and sales, improve our Canadian operations and advance Targets' digital transformation.”

Morgan Stanley: Two Key Pressing Issues

In a note to clients on Wednesday, Simeon Gutman of Morgan Stanley expressed concerns beyond Target's pre-release. In fact, the analyst believes that Tuesday's pre-announcement is proof that Target's operating environment is far more difficult than what was originally anticipated.

“The retail landscape continues to be choppy, with consumers still shopping cautiously,” Gutman explained. The analyst said that while Target's U.S. sales are “fine,” it has been driven by increased promotions following traffic declines in six consecutive quarters.

While the U.S. landscape remains tricky, Target's inability to execute in Canada is a “big issue.” Gutman believes that Target does not have a clear roadmap for its Canadian operations and doubts that one will be created in the near-term.

Bottom line, “for the company to be that far off of its original second quarter EPS guidance of $0.85 to $1.00 shows there is a mismatch between expectations and how the business is playing out,” Gutman wrote.

The only positives that Gutman can find is the fact that costs related to the data breach are not as bad as previously expected.

Shares are Hold rated with a price target lowered to $58 from a previous $60.

Deutsche Bank: Change Can Takes Time

Paul Trussell sees Target's pre-announcement as a step in the right direction as the company can now focus on updating investors on actions it will now take. However, Trussel expresses concerns over Target's ability to regain comp momentum while holding margins steady at the same time.

“We do believe the impact of the breach lingers on as Target remains unable to turn the corner into positive traffic and sales year over year,” Trussel argued in a note to clients on Wednesday. The analyst argues that Target faces a tremendous uphill battle against the convenience of Amazon, the growing competition from dollar stores, as well as the specialty and off-price retail as viable alternatives for certain “cheap chic” products.

Shares are Hold rated with a price target lowered to $57 from a previous $58.

MKM Partners: Sluggish Fundamentals Continue, But Not Unique To Target

Patrick McKeever of MKM Partners believes that Target's pre-announcement is one-part company specific and one-part industry specific.

In a note to clients on Wednesday, McKeever argued that Target's earnings per share shortfall “is more about the ongoing, intense promotional environment across retail, and Target's response to it, than anything company specific.”

McKeever admits that it is difficult to predict when Target's fortunes will turn around as consumer spending continues to focus more on durable goods, including cars and homes.

McKeever also noted that the hiring of Cornell could be a positive move forward. The analyst shares his familiarity with the consumer products industry veteran and holds a favorable opinion. During Cornell's last year at Sam's Club, Cornell managed to increase comps by five percent.

Shares of Target traded recently at $57.99, down 0.07 percent.