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Takeaway: Target's expectations for positive comps and gross margins in 2014 are simply too optimistic.

Editor's Note: Below is a brief, complimentary excerpt from Hedgeye Retail analysis. For more information on our services click here.

Target shoppers wary

 $TGT Way Off Target - target lady

  • “Kantar Retail ShopperScape data indicates that just 33% of U.S. households reported shopping at Target or SuperTarget during January 2014, the lowest penetration number for Target in the past three years, and a 22% decrease in penetration compared to January 2013.” (emphasis added)
  • “The shift away from shopping at Target in January varied among key segments of guests but was most significant among its core guests, including Gen X (shoppers 32 to 49 years old), who are more likely than any other cohort to shop Target, as well as lower-income shoppers, who tend to shop Target at a lower rate in general but whose penetration at Target declined by a full 30% from January 2013 to January 2014.”

$TGT Way Off Target - chart2

Takeaway from Hedgeye’s Brian McGough:

Target (TGT) remains one of our least favorite stocks here at Hedgeye. And wouldn't you know it? The aformentioned research supports just that premise.

Simply put, Target's expectations for positive comps and gross margins in 2014 are simply too optimistic. The company is going to need to be more price competitive to win back sagging customer loyalty. Big time.

Rest assured this will not be an easy task. Not by a long shot. We've never seen a retailer fire its customer and win them back in a few simple quarters. It just doesn't work that way.

Case in point: JCPenney. It's taken the beleaguered company basically three years to reset their customer base. And they still won't be done for another three years.

We recognize that Target's issues are not as severe as JCP. But you definitely can't underestimate these things.

Target is banking on Canada to carry its gross margins, which says it all. Bottom line here is when a retailer needs to bank on Canada to make its margins for the year, the long thesis gets pretty thin.

Enter the World of Hedgeye.