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S&P Cuts Target Corp. (NYSE: TGT) to 'A', Outlook Stable

March 28, 2014 3:59 PM EDT
(Updated - March 28, 2014 4:03 PM EDT)

Standard & Poor's Ratings Services today lowered its ratings on discount retailer Target Corp. (NYSE: TGT), including its corporate credit rating to 'A' from 'A+'. The short term 'A-1' rating is affirmed. The outlook is stable.

"The downgrade reflects our expectations for limited recovery of credit metrics given continued operating losses at the Canadian division as well as potential costs related to the data breach," said Standard & Poor's credit analyst Ana Lai.

The company incurred greater-than-expected losses at its Canadian segment and reported negative same-store sales in the fourth quarter ended Feb. 1, 2014. The customer data breach in the fourth quarter accentuated a decline in traffic and dampened overall sales and profitability. We expect the data breach to have a somewhat lingering effect on customer traffic at least through the first half of fiscal 2014, but this should moderate over time. The related expenses incurred in the fourth quarter were limited, but we expect incremental expenses, penalties, and litigations to emerge in fiscal 2014. While the costs related to the data breach are difficult to forecast, we believe these expenses could be significant but manageable given Target's good cash flow generation.

We expect the performance at its Canadian stores to improve in fiscal 2014 as Target ramps up the new stores and resolves its supply chain issues. As such, we expect operating losses to narrow because of improving sales. and gross margin improvements from lower markdowns. We expect the segment to report EBITDA loss of about $250 million-$300 million through fiscal 2014.

The rating on Target reflects our assessment of a "strong" business risk profile and an "intermediate" financial risk profile.


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