The Worst Looks to Be Over for One Retailer

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Shares of Target are down nearly 10% year to date, with a lot of shareholder's focus on its data breach. However, there appear to be a few other issues that might continue pressuring the stock. During its earnings release last quarter, it announced that it would be halting share buybacks. It will be making no share repurchases during the second quarter. Ultimately, the buybacks will remain on hold until there is more clarity on the costs of the data breach.

Canada remains a question mark
Target has been struggling in Canada. The country was its first international venture, and being just north of the U.S., you would think this would be a relatively easy deployment. However, Target apparently went about the expansion all wrong. Instead of a gradual rollout, Target bought up land across Canada, forcing itself into a countrywide rollout. This ultimately led to supply chain issues.

The supply chain issues have ultimately led to understocked and overstaffed stores. Last quarter, sales in Target's Canadian segment were slightly less than $400 million, and its gross margin for the segment came in at 18.7%. Compare that to the 38.4% gross margin for the Canadian segment during the same quarter last year.

Even Sears Holdings is looking to get out of Canada. It is looking to sell Sears Canada. But there are questions as to who would buy the business. Nordstrom has also decided to taper store openings in Canada. It will delay launching its discount brand, Rack, in Canada until 2017.

There is hope for Target
Target will be getting a new CEO after ousting former CEO Gregg Steinhafel. It has been trying to work down excess inventory, and it noted earlier this year that it has reduced the congestion in its supply chain in Canada. It is also seeing growth in its membership program, REDcard. Target has noted that its REDcard members visit stores twice as much as non-REDcard members, and they also spend twice as much.

Penetration of its REDcard continues to grow as well. REDcard penetration jumped from 6% in 2009 to 19.3% in 2013. Meanwhile, Target has another rewards program that can help drive increased traffic. This new loyalty program will focus on pharmacy rewards. Target noted that pharmacy shoppers spend 50% more than non-pharmacy shoppers and visit three times as often.

Nordstrom is also shaking up its management ranks. It recently added a new head for Nordstrom Direct. This comes as Nordstrom is experiencing marked success in the direct-to consumer segment. Its direct sales were up 33% year over year for the April-ended quarter. More than 20% of its total sales in 2013 were direct to consumer. It only makes sense for the retailer to make this a greater focus. Nordstrom has come out and said that e-commerce is the fastest growing area of its business.

The other positive for Nordstrom is that it is a solid niche in the high-end consumer market. Sears, however, is struggling to find a stable customer base. A large number of Sears' stores remain underinvested in, leaving them not as well maintained as some of its stores located in higher-income markets. This continues to be a drag on the company's sales. However, in its latest attempt to carve out a niche, Sears is looking to develop a membership-type model.

How shares stack up
The three have taken very different paths so far this year. Shares of Sears are down 25%, while Target is down 10% and Nordstrom up 8%. Target is trading at a P/E ratio of 12 based on next year's earnings estimates. That is slightly below Wal-Mart's P/E of 13.2. In addition, with the pullback in the stock price, Target's dividend yield is now slightly more than 3%. That is the highest it has been in five years.

Given its negative earnings, Sears has an incalculable P/E ratio. It also has the highest debt-to-equity ratio at 240%. Nordstrom's P/E ratio is right at 16 based on next year's earnings estimates. Its dividend yield is also slightly less than 2%. Moreover, compared to Macy's, Nordstrom's P/E is high, whereas Macy's trades at a P/E ratio of 11.2.

Bottom line
Target is trading at a discount to Wal-Mart, and it still has the international markets to tap. Assuming the company has used the data breach and mishaps in Canada as learning experiences, investors looking to invest in the department-retail space should give Target a closer look.

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Marshall Hargrave has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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