Mistakes can be forgiven, but negligence must be accounted for. That is the message that Target (NYSE:TGT) acknowledged on March 5 when the company announced that its Chief Information Officer, Beth Jacob, was resigning from her post. While we may never know if Jacob was forced to resign for fear of being ousted, or if her decision to part ways with the company was her own, the rest of the company's executive team is probably hoping that investor furor will subside as a result.
Given the uncertainty surrounding the situation, what does this mean for the Foolish investor? Since the figurehead that investors blamed for the breach is gone, is now an opportune time to jump into the company's shares or is this departure just the start of more pain for the retailer?
Could poor qualifications lead to a management shakeup?
One of the top concerns by Target's management right now is the possibility of shareholders demanding that heads roll in response to the breach. As of right now, Jacob is the only high-ranking person who has fallen victim to the incident, but there is the question of whether she should have held her position in the first place.
After graduating from the University of Minnesota with her bachelor's degree in merchandising, Jacob landed a job with Target as an assistant buyer. She then left the company in 1986 to pursue her MBA and was allowed to return in 2002 as a director of guest contact centers. In 2006, Jacob was promoted to vice president of guest operations and finally assumed the role of CIO two years later.
Judging from her background, it's difficult to argue that she was suitable for the role of a CIO. With no apparent experience in overseeing information systems, Jacob likely was not the best candidate for the position she worked her way up to. For this reason, shareholders will likely take a closer look at the company's roster and could fight to remove those who either aren't qualified or who advocated bringing on unqualified team members.
A blast from the past!
In order to understand how well Target might fare following the data breach, investors would be wise to look at another case that closely mirrors Target's situation. In 2006, fellow retailer The TJX Companies (NYSE:TJX), discovered a significant data breach in which 45.7 million credit and debit card numbers were stolen from their systems. On top of this, the company noticed that nearly half a million individuals had personal data stolen from merchandise that was returned without receipts from 2003.
Fortunately, the fallout for the company wasn't a game-changer. In the year following the breach, the business reported a 7% spike in revenue from $17.1 billion to $18.3 billion. This was followed by a 4% growth in revenue to $19 billion in 2009 and now stands at $27.4 billion. In terms of profits, the breach was negligible. Despite booking a $197 million charge in 2008, the business was able to credit back nearly $31 million in 2009 as its costs came in less than anticipated and net income rose 19% from $738 million to $880.1 million.
Consumers aren't as forgiving in the case of Target!
Based on the experience seen by TJX, shareholders might think that a data breach of Target's size, which resulted in the loss of 40 million credit and debit card records and 70 million records from other customers, may not mean much. However, consumers appear to be less forgiving these days. For Target's most recent fiscal year, the company reported that sales fell 1% from $73.3 billion to $72.6 billion, while net income fell 34% from $3 billion to $2 billion.
Most of this downside took place during the company's fourth quarter, which saw revenue fall more than 5% while net income declined 46%. During the quarter, the business incurred only $17 million in expenses (net of $44 million from an insurance receivable) relating to its data breach. Unfortunately for shareholders, Target's management claims that it cannot estimate what future expenses relating to the breach might be.
As we can see, Target's situation is anything but great. The business allowed at least one member of its top brass to sit in a position they weren't qualified for. This, combined with falling sales and plummeting profits, could signify even tougher times ahead, both for the company and its management team. In the long run, however, there is probably not too much downside for the retailer.
Although customers are treating the business differently from how they met TJX's data breach, the endgame is probably the same. In the short run, the company might be impaired, but just as TJX continued to grow, Target will probably bounce back too. Considering this likelihood, the Foolish investor who doesn't mind sitting through volatile moves in a company's share price may find the business an attractive prospect.
Is Target the Creme de la creme?
Despite the problems facing Target, there is the possibility that the company can reverse course and deliver significant returns to shareholders during 2014. Could the company be the No. 1 stock to hold for the year or is there something better out there for the Foolish investor?
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Daniel Jones has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.