Belus Capital Advisors CEO and Chief Equities Strategist Brian Sozzi rate Target Corporation (NYSE:TGT) as a Sell as they point out some subtle negatives in the company’s earnings report.

Target Corporation

Investors we talk to badly want to find blooming positives on Target Corporation (NYSE:TGT) after a miserable end to 2013. The stock has been routed. The company’s rep on the street (Main Street and Wall Street) is battered. Yet, the brand does so many things better in its stores and online than rival Wal-Mart. Unfortunately, while there were glimmers of hope in Target’s commentary, specifically new information that “sales trends have improved”, the overall early takeaway is one of disturbia. When a company with a heavily indebted balance sheet is unable to estimate the impact of an event it calls “material’ in its 8-k, an investor has to proceed with caution. Even when drilling into the core of the report, meaning trying to get beyond the data breach impact, Target’s global holiday season was concerning. BTW, beware on the early stock rise: the quarterly EPS beat was of low quality due to a plunge in interest expense.

5 non so obvious points of pain from Target’s earnings report

1. U.S. same-store sales -2.5%, underperofring Wal-Mart Stores, Inc. (NYSE:WMT) U.S. at -0.4%. Card breach or not, one is left with a short-term view that Wal-Mart’s investment in price across its store is leading to share gain (not highly profitable share gain, but share gain nonetheless). While we are here, take note of the 100 bps drop in Dollar Tree, Inc. (NASDAQ:DLTR)’s gross margin reported in its earnings today. There is a price war now underway in discount retail being led by Wal-Mart, and crushing already slim gross margins.

2. Gross margin -20 bps in the U.S., a touch more of a drop off than we have come to expect from Target Corporation (NYSE:TGT). Part of the compression is a function of post-breach discounting efforts to rebuild traffic levels, but there is a component there of having to go all out to compete.

3. Canadian gross margin a shockingly low 4.4% versus the U.S. at 27.6%. No surprise to us given what our sources have been reporting back to us from inside Target Canada stores. Out of stocks. Liquidation sales. Poor price perception. Target Canada will be a material drag to the company’s consolidated financials in 2014.

4. No share repurchases in the quarter as Target Corporation (NYSE:TGT) appeared concerned about its credit ratings. Given no estimate on the impact of the data breach, Target remains in a position to disappoint its investors in terms of shareholder actions in 2014 (no dividend raise, pullback in buyback commitment).

5. Inventory +10.81%, which doesn’t fit too well with Target Corporation (NYSE:TGT)’s mention of improving sales trends and seemingly optimistic 2H14 EPS guidance. Wal-Mart’s inventories increased 2.4% in 4Q13.