Troubling times at Target, data breach situation worsens

The nightmare continued for Target on Friday as worse than expected fourth quarter same store sales prompted the company to slash its profit forecast while it made troubling new disclosures about the theft of information involving 70 million customers.

The company said it now expects to report a fourth quarter comp decline of 2.5%, well below an earlier forecast of flat comps, while adjusted earnings per share are now projected in a range of $1.20 to $1.30 compared to an earlier forecast of $1.50 to $1.60.  And if that weren’t bad enough, a huge cloud of uncertainty now hangs over the company’s future GAAP, or generally accepted accounting principle, results which it said are likely to include a charge of unknown proportions in the fourth quarter or future reporting periods.

In addition to these major downward revisions, the company made another troubling disclosure. As part of its ongoing investigation into the initial data breach involving credit and debit card information on 40 million customers, Target said it learned that the names, mailing addresses, phone numbers or email addresses for up to 70 million individuals also had been stolen.

“I know that it is frustrating for our guests to learn that this information was taken and we are truly sorry they are having to endure this,” said Gregg Steinhafel, Target chairman, president and CEO. “I also want our guests to know that understanding and sharing the facts related to this incident is important to me and the entire Target team.”

The company said the theft was not a new breach, but was uncovered as part of its ongoing investigation and indicated much of the data was partial in nature. Target said in cases where it has an email address it would attempt to contact affected customers with information about how to avoid scams and provide a year of free credit monitoring and identity theft protection.

Were it not for the data breach, Target appeared to be enjoying a solid holiday season. The company said its sales were stronger than expected prior to the December 19, 2013 disclosure of the data breach. Once the news broke, things headed south quickly and the company said is saw “meaningfully weaker” than expected sales, even though it instituted a 10% across the board discount for customers who shopped its stores the final weekend before Christmas.

Beyond the lost sales, reduced profitability and erosion of trust among loyal customers, Target said it is likely to incur a charge whose size it isn’t yet able to estimate because it doesn’t know how much it will have to spend on a range of data-breach related costs. According to the company, the costs may include liabilities to payment card networks for reimbursements of credit card fraud and card reissuance costs, liabilities related to REDcard fraud and card re-issuance, liabilities from civil litigation, governmental investigations and enforcement proceedings, expenses for legal, investigative and consulting fees, and incremental expenses and capital investments for remediation activities.

“In light of the recent data breach, our top priority is taking care of our guests and helping them feel confident in shopping at Target,” said Target CFO John Mulligan. “At the same time, we remain keenly focused on driving profitable top-line growth and investing our resources to deliver superior financial results over time. While we are disappointed in our 2013 performance, we continue to manage our business with great discipline and leverage our expense optimization efforts to reinvest in multichannel initiatives that generate long-term value for our shareholders.”

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