Data Breach May Not Kill Target After All

Today's major economic report shows that new home sales hit a five and a half year high last month, when seasonally adjusted new home sales rose 9.6% to 468,000, according to the Commerce Department. But that wasn't enough to get investors too excited and near the end of trading the Dow Jones Industrial Average was up just 0.10%.

There were few major movers in the blue-chip index, but one down and out retailer was catching investors' attention today.

Target making a comeback
Target , reported earnings this morning and is up nearly 7% for the day. Fourth-quarter sales were down 3.8% to $21.5 billion, while net income dropped 46% to $520 million, or $0.81 per share. On the surface that doesn't look like a positive sign, but visitation dropped after 40 million credit card numbers were stolen during the holiday shopping season. So all things considered it could have been worse.

Target stores saw a drop in traffic last quarter, but management says buyers are slowly returning.

A 2.5% drop in same-store sales compares favorably to a 0.4% drop at Wal-Mart stores and shows the overall challenge retailers are facing. But the specific impact on Target can be seen by a 5.5% reduction in the number of transactions that was offset by a 3.2% increase in average transaction amount. Again, things could have been worse, and if that lost traffic comes back we could see a big rebound in revenue.

For 2014, earnings per share are expected to be between $3.85 and $4.15, down from $4.38 collected last year. But when you consider that the fourth quarter of 2013 was only half affected by the data breach those numbers aren't all bad and came in near the $4.15 analysts expected.

Long road for retail
As of now, the data breach at Target looks like a short-term impact; while it will be costly for the company and insurers it won't fundamentally disrupt the business. What's more disruptive is the online shopping that's slowly been taking share from all retailers over the past few years.

If Target can get past this, I think its focus on more affluent consumers than Wal-Mart will be a huge advantage because those consumers are less likely to flee to lower prices online and more likely to appreciate the design Target incorporates in its products.

The stock isn't cheap at about 15 times 2014's earnings, but it's a good option in retail and remains profitable despite the challenges the company has faced in the last month alone.

How should you be playing retail now?
Target and Wal-Mart have a long road ahead and to learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

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Travis Hoium manages an account that owns shares of Target. 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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