KEY RATING DRIVERS
The rating reflects Target's strong competitive position in the discount retail sector and steady but recently softer performance from its U.S. business. These factors are balanced against a difficult market entry into
Sales were soft in Target's U.S. segment in 2013, reflecting the challenging environment facing low- and middle-income consumers, exacerbated by the data breach that was announced one week before Christmas. Target's U.S. comp store sales were down 0.4% in 2013 and down 0.3% in the first quarter of 2014 (1Q'14). The EBIT margin narrowed from 7.8% to 7.0% during 2013 due primarily to lower credit card income following the sale of the receivables portfolio to TD Bank in
The significant shortfall in the performance of the Canadian business could constrain Target's results over the medium term, as sales volumes are much lower than initially expected. The costs associated with clearing excess inventory in
However, generating positive EBITDA in
Fitch views the data breach, which was announced on
Free cash flow (FCF) post-dividends is projected at around
Adjusted leverage was 2.55x at
A positive rating action could be triggered by improved operating momentum in the domestic business, a successful turnaround in
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 rates Target as follows:
--Long-term 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'.
--'Corporate Rating Methodology' (
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Source: Fitch Ratings
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