Target may have bigger problems than its CEO

Target is getting a new CEO, but is that enough to get the stock going?

Brian Cornell, CEO of PepsiCo Americas Foods and former CEO of Sam's Club, was named Target's new boss on Thursday. Former Target CEO and chairman Gregg Steinhafel resigned in May afterthe Christmas shopping season's credit card data debacle and the company's messy foray into the Canadian market.

But if Goldman Sachs' recent report on big-box retailers is correct, Target may have bigger problems ahead. Goldman's Matthew Fassler, Stephen Tenal, Chandni Luthraand Prasanth Jangareddi write:

"We believe that the ongoing emergence of e-commerce is devaluing the impact of breadth of assortment in-store for general merchandise retailers; consumers appear more focused on some combination of value and convenience. Narrow-assortment retailers, including dollar stores, drug stores, and warehouse clubs, are taking share from broad-assortment retailers, namely Wal-Mart and Target."

Online retailers like Amazon are offering competitive prices for larger-ticket items. Drug stores are now conveniently selling things like food and smaller items relatively cheaply. Dollar stores and warehouse clubs are also becoming popular thanks to the prolonged economic malaise over the past few years. That's all squeezing the big-box giants.

Still, Goldman maintains it "buy" rating and a 12-month price target of $65 on Target's stock. Shares closed at $61.38 on Wednesday.

So can a change in top management make a difference?

According to Erin Gibbs, equity chief investment officer at S&P Capital IQ, Target shareholders are really looking to see how Cornell brings back customer confidence in wake of the past year's security breach as well as how he deals with the company's Canada problems.

"Whether Cornell will be able to overcome those challenges remain to be seen," Gibbssaid. She agrees with Goldman's assessment that consumers really want a combination of value and convenience. But she also agrees with Goldman's take that Target's earnings expectations are low while free cash flow and its dividend yield – currently around 3.6 percent – are solid.

"We actually like it as one of the more defensive positions in portfolios," said Gibbs, who is responsible for all her firm's equity products, which includes over $11 billion in assets under advisory. Target is in portfolios she advises though it is not in her personal portfolio. S&P Capital IQ has received compensation from Target for services over the past 12 months.

Gibbs said that Target's dividend yield makes the stock particularly attractive. "Even if the price just depreciates, and keeping the same valuation metrics where we are now, we could easily see mid-teen total returns if not high-teen total returns over the next year," she said.

Steven Pytlar, chief equity strategist at Prime Executions, is not as enthusiastic about Target based on the company's three-year chart. He sees it has having broken below a long-term uptrend a year ago, and it has yet to trade above it.

"We definitely don't see any strong indications that the trend is turning back up yet," Pytlar said. "There does look to be ongoing selling following that break of the trend line in about Q3 of last year."

Pytlar notes the stock has made a series of lower highs over the last 12 months. "That just describes a stock where buyers are turning into sellers," he said. "They are looking to get out of positions, and that looks to be an ongoing process."

Target could trade back down to the $55 per share level, Pytlar said. That's where he thinks it may find some support.

"Around there we would start looking for value buyers essentially to come in," Pytlarsaid. "We'd see price form a floor there theoretically and then maybe we get more positive on it. But just in the very near term, it does look still a bit risky. We would expect some near-term downside."

To see the full discussion on Target, with Gibbs on the fundamentals and Pytlar on the technicals, watch the above video.

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