- Target's problems extend deeper than the recent data breach, to additional lapses in leadership.
- These include a failed expansion into Canada and increasingly falling behind competition, as well as leadership overhauls.
- We suggest investors take some profits in Target and consider rapidly, consistently expanding Amazon.
It's no secret that Target (NYSE:TGT) has fallen on hard times lately. After suffering through a weak retail sector for the first four months of 2014, the company's difficulties have reached to its highest ranks with the resignation of its chairman and chief executive officer, Gregg Steinhafel.
The resignation was announced this Monday by the board of directors, which cited the need for a new leader in the wake of a major security breach which has caused much harm to the reputation of the company. On November 12, 2013, hackers broke into company databases and compromised 40 million credit cards and 70 personal points of data, such as addresses and telephone numbers.
Adding insult to injury, the breach was exacerbated when a report prepared by the Senate Committee on Commerce, Science, and Transportation revealed that the company ignored internal warnings about the breach from its hacker-detention software.
Looking To Blame
Though Steinhafel took personal responsibility at the time for the breach, it wasn't enough. The writing was on the wall for a change when Chief Financial Offer, John Mulligan stated at the time, "We are asking hard questions about whether we could have taken different actions before the breach was discovered that would've resulted in different outcomes. In particular, we are focused on what information we had that could have alerted us to the breach earlier; whether we had the right personnel in the right positions; and ensuring that decisions related to operational and security matters were sound."
As an initial step to demonstrate accountability for the disaster and satisfy investor calls for someone to be punished, the company announced last month the resignation of Chief Information Officer, Beth Jacob. She was replaced by Bob DeRodes, a former adviser to the Department of Homeland Security, the Justice Department, and the Secretary of Defense. Steinhafel's departure marks the final step in a changing of the guard for the company.
Deeper Problems at TGT
The security breach took place at a key juncture in the 2013 holiday shopping season, just a couple weeks before the coveted revenues of Black Friday are realized by retailers. While the breach no doubt contributed in part to a 2.5 percent decline in comparable fourth-quarter year-over-year sales, the problems at Target go much deeper.
A failed expansion into Canada by the discount retailer is also taking a major toll on investor confidence and the stock price. The idea behind this Steinhafel-led expansion was that Canadian shoppers, who had crossed the border into the United States to shop at its stores, would be eager to shop at stores at home in Canada. The strategy failed when shoppers found that prices were higher in the Canadian stores, while at the same time, competing stores in Canada lowered their prices in an effort to gain spurned Target shoppers.
The Canadian expansion netted a $941 million loss in 2013 before interest and taxes, and shaved $1.13 per share earnings from the company. In addition, while Target and its 1,900 North American stores trail only Wal-Mart Stores, Inc. (NYSE:WMT) in the discount retail market, it has lagged behind its competitors in an online retail presence, including Wal-Mart and Amazon.com (NASDAQ:AMZN).
How Investors Should Move Forward
All of these weaknesses have led to the obvious: a change in leadership for the company. While analysts recognize Steinhafel's significant contributions in the past, the general feeling is that new energy is necessary to jettison past struggles and reposition the company for bold moves in the future.
In the interim, we suggest investors take some profits in TGT and consider positions in AMZN, which has also shown impressive growth in cloud services.
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