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Summary

  • Target needed a new leader before the data breach, during the data breach, and after the data breach. It also needs a new vision.
  • Clearly Target holds tremendous value, but leadership made a few bad decisions over the past year. These decisions are eroding that value and stalling future growth.
  • Now that the change in leadership has been announced Target can focus executive thinking power on fixing declining same-store sales.

Today we are announcing that, after extensive discussions, the board and Gregg Steinhafel have decided that now is the right time for new leadership at Target. -Target Press Release

In a recent article I predicted this moment, though I didn't think it would come so soon. Still, some say Steinhafel's resignation should have come even sooner. "It would have been better to start the year with fresh eyes and a fresh approach," said Brian Sozzi, CEO of Belus Capital Advisors.

Target's (NYSE: TGT) shares fell as much as 3% in morning trading, but the announcement of new leadership is welcomed news for Target, just as it was for Wal-Mart (NYSE: WMT).

After Wal-Mart pleaded guilty to international bribery charges last year, it became more focused on damage control than on the real issues at hand, namely declining same-store sales. Wal-Mart's new CEO has been in his new office since February and he's already given the company a new vision, a renewed focus. The change in leadership allowed Wal-Mart to move on and a change in leadership will do the same for Target.

Three reasons for the resignation
As I've always said, Target holds tremendous value. The company's well-known branding and 46-year track record for paying dividends have made it one of the darlings of the retail industry. However, last year the company's earnings took a dive.

2013 was a difficult year for Target marked by three notable events that contributed to the decline in earnings:

  • A 0.4% decline in same-store sales
  • A poor performance in Canada
  • The data security breach

It's important to note that Target's same-store sales had already declined significantly in the nine months leading up to the fourth quarter, before the data breach. Target's same-store sales growth dropped from 3.7% in the first nine months of 2012 to 0.5% in 2013. The drop is primarily attributable to a 1.5% decrease in the number of transactions over the same time period.

There was little talk about what solutions the company had planned to remedy the drop in transaction volume. Hopefully this will be the first priority of new leadership.

With regard to Canada, Sozzi refers to Target's Canadian expansion as a "giant failure," adding that the company failed to connect with Canadian shoppers in such a value-driven environment. To be fair, Canada's retailers are in the midst of a pricing war which makes this a difficult time for most retailers in the market. On its last earnings call, Wal-Mart had this to say about its Canadian performance:

...comp sales decreased 1.7%. Comp traffic decreased 2.7% with ticket increasing 1%. The decrease in comp store sales was due to several factors, including exceptionally severe winter weather during December, declining consumer spending and price competition.

Clearly, Target isn't the only one having a difficult time in Canada. It's just a matter of time before the company exits Canada and redeploys those resources.

With regard to the security breach, the breach was actually a vendor-management issue. Thousands of vendor relationships exist within the supply chain. As a result, communication within the supply chain, in terms of data share/capture, is tightly controlled. The real story: Target's supply chain was the weakest link and hackers gained access to Target's computer system by using the stolen credentials of a heating and refrigeration vendor. Some may say this is the fault of the CFO or possibly internal audit, but ultimately it falls to the CEO. Now that the CEO is gone, the assignment of blame can be put aside, at least temporarily, and improvements can be made.

Conclusion
CNBC interviewed Mad Money's Jim Cramer on the morning of the announcement. Cramer believes Target lacked vision, and vision is a function of good leadership. When it's missing even the most admired companies can make the wrong decisions by focusing on the wrong goals.

Target's stock dropped on the morning of the announcement as well, but it was a buying opportunity. Likewise, the change in leadership had to occur in order for the company to move forward, and that's exactly what the company, and its stock, are doing. I predict this time next year the data breach will be a thing of history and Target will have a new vision that includes same-store sales and earnings growth towards $5.00. It's only a matter of time.

Source: A New CEO Is Welcome News For This Retailer