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Summary

  • The proposed investment of $100 million into chip-enabled card technology is a good initiative but will not be implemented until 2015.
  • The company has a $100 million insurance coverage but the potential loss may exceed $1 billion and this will hurt the company’s financial position in the short run.
  • Investors need to keep a close eye on the recent updates regarding the data breach investigation before considering investing in Target Corporation.

Target Corporation (NYSE:TGT) operates general merchandise stores in the U.S. and Canada. I know every investor knows about the recent data breach incident at Target Corporation so I am trying to conclude whether or not this problem will affect the company in the short run. Prior to the announcement of the data breach the fourth quarter comparable sales were positive and reflecting the success of the holiday season but after the reported issue Target's comparable sales decreased 2.5% in the fourth quarter. Overall, revenues and net income declined in the fourth quarter compared to the same quarter of last year.

Data Breach:

Target suffered from a massive data breach during the holiday shopping season and it is believed that about 40 million credit and debit cards records were stolen. Attackers gained access to customer names, credit or debit card numbers, card expiration dates and CVV security codes.

Short Term problems:

Different banks are also seeking damages from Target for the costs they are incurring in terms of spending time and money to create new cards and refunding lost deposits. In cases where banks had to reimburse their customers because of any fraudulent activity these banks are entitled to recover their money from Target, said Larry Golston an attorney who brought forth the case.

Target is still suffering from the low traffic at their stores and the data breach still has a lingering negative impact on its customers service and reputation scores. A quarterly survey was conducted recently for the first time since the Target breach in mid-December and it found meaningful decreases in YOY customer satisfaction. Satisfaction with overall shopping experience at Target was down 2% in March with declines "most acute" among middle and upper income shoppers.

Affecting more than 40 million customers is not a minor issue and I believe it will take some time for Target to regain its customers' trust and loyalty.

Target's credit rating was cut by the S&P last week because the rating firm said it expects the data breach will hurt the company's traffic at least through the first half of the year.

The company is not disclosing the expected fines in dollar value because the company is currently facing litigation in 80 cases (Form 10-K 2013) in different courts. So far, the company has spent $61 million to cover costs associated with the breach and an expected $44 million of that will be covered by insurance and this will result in a $17 million net cost. Going forward the company is expected to incur more costs related to the data breach incident so the company has maintained $100 million (From 10-K 2013) of network security insurance coverage and a more than $10 million deductible.

But now the important question is will the damages exceed $100 million? According to an estimate by Jefferies analyst Daniel Binder "If the government's probe finds Target at fault for not complying with industry- specific security standards then the company may face fines in the range of $400 million to $1.1 billion". So if the fine is around the estimated figures it will further hurt the company's position in the short run.

The Company's New Investment:

Due to the data breach the company is accelerating its $100 million investment into chip-enabled card technology and I believe this will help the company to regain its customer's trust. This technology is already successfully used by different countries. The company is aiming to implement this new technology in their stores and on their proprietary REDcards by early 2015. This smart card has tiny microprocessor chips that encrypt the personal data shared with the sales terminals used by merchants. The big advantage of this new technology is that even if a thief manages to steal a smart card number it's useless without the chip.

Data Breach:

Moreover this is not the first time such an incident has happened. The security breach at TJX companies (NYSE:TJX) resulted in a theft of payment data of more than 45 million customers by exploiting an unsecured wireless network in 2007. The company ended up paying more than $250 million as a result of this breach. Fortunately the company recovered strongly and rebuilt its customer trust.

Target is also offering affected customers one year of free credit monitoring and has said guests will not be liable for purchases made fraudulently with their accounts. So the new investment and free credit monitoring will hopefully help the company regain its revenues and earnings.

Conclusion:

Target is the leading retailer in the U.S. and I believe that the company can regain its growth momentum in the long run as store traffic will recover gradually once the data breach's impact fades. Things look shaky, at least in the short run, unless some decisions have been made regarding these lawsuits that company is facing right now. In the long run the company's position looks stable as it seeks to introduce new technology to rebuild its customers' trust in the coming years. Investors are advised to keep a close eye on the recent updates regarding this case before investing in Target.

Source: Implications Of Data Breach On Target