Target to Overhaul Information Security after CIO Resignation

Edited by Vani Rao

To expand its CityTarget smaller concept stores

Target Corp. (NYSE:TGT) announced an overhaul of its information security practices following the resignation of its Chief Information Officer (CIO) as the retailer tried to reassure customers and investors after a massive data breach late last year.

CIO Beth Jacob is the first high-level executive to leave the company following the breach, which led to the theft of about 40 million credit and debit card records and 70 million other records of customer details. The breach at Target was the second-largest at a US retailer, after the theft of more than 90 million credit cards over about 18 months was uncovered in 2007 at TJX Cos Inc. (NYSE:TJX), an operator of the T.J. Maxx and Marshalls chains.

Target Chief Executive Gregg Steinhafel said the company would elevate the role of chief information security officer as part of its plan to tighten its security. Target will look to fill this position externally alongside the post of Chief Compliance Officer.

In this regard, Target would be working with Washington DC-based external consultant Promontory Financial Group as it evaluates its technology, structure, processes and talent. Moreover, the company has also been working towards the implementation of chip and PIN card support, a tool that will further ensure customer security. The company also offered free credit monitoring for a year in the wake of the breach disclosure.

Hacking has become a major concern for retailers in the US. In the latest reported breach, beauty products retailer and distributor Sally Beauty Holdings Inc. said on Wednesday, 5 March 2014, that its network had been hacked. However, no card or customer data appeared to have been stolen.

Declining Performance

Target has failed to meet analysts’ estimates in its most recent quarterly reports as it faced a challenging retailing environment. The fourth quarter of 2013 proved to be equally difficult for the retailing giant. The graph below shows the share price movement of Target in relation to S&P 500.

Source Bloomberg
Source Bloomberg

Target experienced some extraordinary headwinds during FY14 that were capped by an operational underperformance in the fourth quarter. The company continued to fail to meet Wall Street estimates and saw a decline in earnings and revenues as compared to the year-ago period.

Target launched in-store pickup chain-wide at the beginning of November, and with very little marketing, this new offering became a meaningful driver of digital traffic and sales. Given the early success with these programs and initiatives, Target fully intends to continue to invest in systems, data, and processes to enhance flexible fulfilment capabilities as part of its future growth plans.

Launch of smaller concept stores

Given the increased competitive landscape in the retail industry and the initial success of the CityTarget, which are the company’s smaller concept stores, Target plans to expand this successful format.

Target believes that this design provides them with an opportunity to expand into new trade areas, providing a convenient solution to guests who cannot visit one of its other format stores. Interestingly, this model has not worked so well in the past for other retailers who have implemented the same strategy. It is generally seen that if the merchandise isn’t different in the sub-store set formats than in the general merchandise store formats, then the smaller concept stores are bound to fail.

Moreover, Target experienced a 20% rise in selling, general, and administrative (SG&A) expenses in 2013; hence, the company has taken on cost-cutting measures not seen since 2008. One way that Target aims to cut costs is by trimming payroll-related costs. However, given the huge size of the company, this measured objective could result in either stunted revenue growth or a decline in revenues.

Guidance

Target ended 2013 with some extraordinary events that resulted in negative earnings and revenues on a YOY basis. Target expects a US segment EBITDA rate of 10.1-10.3%. Target expects gross margin to improve 30-40 basis points from the 2013 rate of 29.8%, with capital expenditures of $2.1-2.3 billion, up slightly from actual 2013 spending.

In Canada, Target expects total sales to almost double as compared to the 2013 levels. The company expects to earn higher gross margin rate of roughly 30%. In Canada, Target expects 2014 capital expenditure of $300-400 million, down more than $1 billion from peak spending in 2013.

Target has a strong balance sheet, a strong dividend, and a strong buyback program; all of which are expected to grow in 2014. It doesn’t really matter what Target does operationally to cut costs, reformat stores, and how they connect with the consumer through digital channels. This is mainly because every retailer in Target’s business segment is doing the same thing. Hence, Target will have to spend a huge amount to differentiate itself from that of its competitors in order to succeed and grow revenues and sales in the near future. The chart below shows the change in same store sales as well as the YOY trend change for Target.

Source Company Data
Source Company Data

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