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S&P Lowers Rating on Target

Zacks Equity Research

Target Corp.’s (TGT) woes seem far from over.  As per media reports, Standard & Poor's Ratings Services has dealt a blow to the company by cutting its debt rating to “A” from “A+” after a massive security breach and not-so-profitable Canadian operations that marred its fourth quarterly performance. However, the stock price did not witness much movement as it fell a meager 0.4% on the index.

Target, one of the largest discount retailers, faced a massive security violation during the holiday season, from a day before Thanksgiving up to Dec 15. The company publicly recognized the breach, which affected 70 million of Target’s customers, four days later on Dec 19, 2013.

The security breach reduced footfall considerably and subsequently dented the sales and profitability. Target’s fourth-quarter fiscal 2013 adjusted earnings (U.S. operations only) of $1.30 per share dropped 21.2% from $1.65 in the year-ago quarter. Total revenue dropped 5.3% to $21,516 million from the prior-year quarter.

Apart from the breach, Target’s much anticipated Canadian expansion met with disappointing results as it reported an operating loss of $941 million in its first year. Target, which competes with Family Dollar Stores Inc. (FDO), Dollar Tree, Inc. (DLTR) and Big Lots Inc. (BIG), had first entered in Canada in 2013.

Further, the rating agency believes that the breach is likely to keep traffic at bay for some more time and may result in potential costs (litigation, compensation, etc.) during the first half of fiscal 2014, thereby putting Target’s revenues under pressure.  

However, S&P believes Target’s steady cash flow generation will help manage the expenses without much difficulty and the Canadian division’s performance will also improve in fiscal 2014. The agency has also reiterated its long-term outlook on the retailer at “Stable.”

Currently Target carries a Zacks Rank #3 (Hold).

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