3 Reasons to Be Bearish on Target

Source: Getty Images

The demise of Target (NYSE:TGT) didn’t begin lightly. For years, the discount retailer has provided quality goods from clothing, food, and video games to DVDs, electronics, and home goods. Its prices have always been low, and customers were nearly guaranteed to find what they were looking for because of the store’s huge inventory. However, things began to turn sour very quickly as the franchise entered into winter 2013-2014, and now the company is feeling the heat. Shares are down more than 5 percent this year to date and 14.5 percent year over year, lagging a 2.9 percent YTD gain and a 16.5 percent year-over-year gain for the S&P 500.

First came the credit card breach: It was one of the worst in U.S. financial history, and Target has paid enormous financial and social costs in its attempt to resolve the issue. Next came the rollout of Target Canada. The company was betting that Canadian market would be healthy enough and the consumers hungry enough for discount big-box goods to justify the expansion, but the franchise had low inventories on almost all its goods and products and its prices were higher than expected. At the end of it all, the company’s CEO resigned, leaving no one at the helm to fix these issues.

2014 has been known thus far as the demise of Target. It has alienated its customers and needs to make meaningful reforms in order to address the headwinds it faces. To explore the idea, we’ll take a look at the aforementioned three major issues one at a time.

Source: Thinkstock

1. The data breach

It all began in late December 2013, when security expert Brian Krebs at Krebs on Security revealed that Target was investigating a major data breach that potentially involved millions of customer credit and debit card records. The next day, Target confirmed that up to 40 million consumer credit and debit cards had been compromised. It was discovered that hackers had gained access to customer names, card numbers, expiration dates, and CVV security codes of cards issued by various financial institutions. In addition, PIN data for all the cards were confirmed by Target to have been stolen.

What came next shocked consumers. In early January, Target revealed that the names, mailing addresses, phone numbers, and email addresses of around 70 million people were compromised, bringing the total number to around 110 million. Bloomberg Businessweek later revealed that the FireEye security service the company employed had ample time to stop the theft but did not act in time.

After this, the company began to work with law enforcement, including the U.S. Secret Service, to bring the hackers to justice. But not even a 10 percent discount as an apology would qualm the storm of consumer ire that had been unleashed, USA Today reported. Total transactions fell between 3 and 4 percent versus the same time the year before. Later, a 17-year-old Russian teen was suspected  by Time Magazine to be the author of the point-of-sale malware program, or “BlackPOS,” but it was eventually discovered to be 23-year-old Russian Rinat Shabayev who claimed to be the malware author, according to The Hacker News.

Source: http://www.flickr.com/photos/roadsidepictures/

2. Canadian expansion

The United States and Canada have many common stores and brands. There is so much demographic overlap that it seems logical to bring a very well-liked and well-thought-of chain into the Canadian economy. But amid the major data breach that Target was going through in the U.S., the rollout of Target Canada seemed destined to weigh heavily on the company’s bottom line. Right out of the gate, the division began producing $800 million to $900 million losses. The logic of opening 124 stores was questioned  by Rob Wilson, a retail analyst at the Tiburon Research Group in San Francisco, according to The New York Times.

Customers were furious at store openings, as inventory problems led to empty shelves due to apparent shortages, the Times reports. The store also didn’t carry any of the types of exclusive brands you can find at any comparable U.S. Target store. And probably most important grievance is that Canadian shoppers contended that Target’s prices were much higher in Canada than in the U.S.

The company isn’t giving up, though. According to Trefis, Target Canada can double its revenues this year and generate $6 billion by the end of its fifth year in operation. The Canadian division has targeted a gross margin of 30 percent for 2014, which is on par with its domestic business margins in the United States.

Source: Thinkstock

3. The resignation of Gregg Steinhafel

Then came the big one: Target Chairman and CEO Gregg Steinhafel stepped down after the massive data breach endured by the retailer. CFO John Mulligan was elected as the replacement for Steinhafel, who had been with Target for 35 years. Though Steinhafel repeatedly apologized to customers for the breach, according to The Washington Post, it is still a major breach of the trust for the customer. How are consumers supposed to trust a company when it cannot protect their data?

Being the highest-ranking member in Target and resigning amid a crisis does not necessarily speak leadership in loud terms. Steinhafel was the person who best understood what was going on with both the data breach and with the company’s strategy at large. Now, with his resignation, it will be up to Mulligan to solve the problem.

Target has since also hired a new chief information officer to replace Beth Jacob. A former tech consultant to government agencies, including Homeland Security and the Justice Department, Bob DeRodes will hopefully do a better job than his predecessor.

More From Wall St. Cheat Sheet: