Fitch: No Rating Implications from Target's Update on Data Breach and Financial Performance

CHICAGO--()--Fitch Ratings does not expect any rating implications following Target's announcement that it expects lower earnings due to the data breach and higher losses from its Canadian operations in the fourth quarter.

Fitch believes the data breach is a manageable issue, although the disclosure that additional personal data had been stolen - including names, mailing addresses, phone numbers and email addresses - may further erode customer confidence, suggesting that the negative sales impact from the data breach will continue into fiscal 2014. Target is now guiding to a fourth-quarter comparable store (comp) sales decline of 2.5%, compared with its previous guidance for a flat comp, due to a sales drop-off following the disclosure of the data breach on Dec. 19, 2013, and a reduction in operating income of roughly $300 million. Fitch expects other costs such as fraud reimbursement, card reissuance costs and litigation will be manageable in the context of the company's healthy ongoing cash flow.

Fitch views the weaker performance of the Canadian business as an issue that could constrain Target's results over the medium-term, as sales volumes build more slowly than expected. The costs associated with clearing excess inventory in Canada will likely be focused in the fourth quarter of 2013, with management having increased its guidance for fourth quarter losses from the Canadian business to more than $400 million, compared with expectations at the beginning of 2013 that the business would generate positive EBIT in the quarter.

For the full year, operating losses from the Canadian business will likely exceed $1 billion, a negative swing of more than $600 million from Fitch's prior expectations. These losses together with the incremental losses from the data breach will likely yield full-year 2013 EBITDA of $6.1 billion-$6.2 billion, or 15% below Fitch's original expectations for the year. This implies that adjusted leverage will remain in the mid-2x range for the full year, rather than improve to the low-2x range.

Looking ahead to 2014, Fitch expects overall top-line growth of 2% reflecting flat comp store sales in the U.S. due to the ongoing impact of the data breach, and a full year of sales from the Canadian stores. EBITDA margins are expected to improve to the 9% range due to reduced losses from the Canadian business. Further assuming flat debt levels, consolidated leverage could improve modestly to around 2.4x.

Beyond 2014, assuming 2%-3% comparable store sales growth and steady margins in the U.S., and improving profitability from the Canadian business, adjusted leverage moves into the low-2x range. Target has refrained from repurchasing its shares since the second quarter of 2013, and Fitch expects the company will manage its share repurchases going forward in the context of maintaining adjusted leverage in the low-2x range.

Rating Sensitivities:

A positive rating action could be triggered by strong operating momentum in the domestic business, a successful expansion into Canada, and a policy to maintain leverage at or below 2.0x.

A negative rating action could be triggered by operating shortfalls and/or more aggressive share repurchase activity that drove leverage to over 2.5x for an extended period.

Fitch currently rates Target Corporation as follows:

--Long-term Issuer Default Rating (IDR) 'A-';

--Senior unsecured debt 'A-';

--Bank credit facility 'A-';

--Short-term IDR 'F2';

--Commercial paper 'F2'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 8, 2012);

--'Short-Term Ratings Criteria for Non-Financial Corporates' (Aug. 8, 2012).

Applicable Criteria and Related Research:

Short-Term Ratings Criteria for Non-Financial Corporates

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714415

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

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Contacts

Fitch Ratings
Primary Analyst
Philip M. Zahn, CFA, +1 312-606-2336
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Monica Aggarwal, CFA, +1 212-908-0282
Senior Director
or
Committee Chairperson
Michael Weaver, +1 312-368-3156
Managing Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Philip M. Zahn, CFA, +1 312-606-2336
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Monica Aggarwal, CFA, +1 212-908-0282
Senior Director
or
Committee Chairperson
Michael Weaver, +1 312-368-3156
Managing Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com