Will Target Recover From Its Crises of Leadership? 2 Things You'll Want to Watch

Target is quickly losing the loyalty of customers and investors alike. Management needs to get in front of the issues that are causing profits to fall off a cliff.

May 8, 2014 at 9:31AM
Target

Source: Wikimedia Commons

Discount retailer Target Corp. (NYSE:TGT) is in damage-control mode. First, Target went on an ill-advised expansion campaign in Canada to keep up with competitors like Wal-Mart Stores (NYSE:WMT) that are looking to new markets for growth. Target's growth strategy has cost a lot of money and it has provided little in return. Second, its infamous security breach, in which millions of shoppers had their personal data stolen, means that the company can't seem to get out of its own way.

This is unfortunate, since Target is a quality brand with an established customer base. That is in danger, though, if management doesn't do more to get in front of these issues.

The security breach is front and center
Target is under attack from several issues that are currently weighing on the company. First and foremost is the security breach Target revealed late last year. It announced that as many as 70 million shoppers had their personal information stolen during the holiday shopping season. Hackers obtained data including payment card numbers, names, mailing addresses, phone numbers, and email addresses. This has done significant damage to the company's brand connection and reputation with consumers.

The data breach arguably cost Target's Chairman and Chief Executive Officer Gregg Steinhafel, a 35-year company veteran, his job. The board of directors' decision to remove him is now igniting fears that Target has even more bad news in store. It's difficult to imagine things getting much worse for Target, as it's universally known that its upcoming earnings will suffer mightily in light of everything going on right now.

Target assured investors in its fourth-quarter earnings release that it "will continue to work tirelessly to win back the confidence of our guests and deliver irresistible merchandise and offers, and we are encouraged that sales trends have improved in recent weeks."

Based on these comments, there's a sense that things might have improved in the first quarter. If that is not the case, the company will look bad because of a lack of credibility. Making matters cloudier is that the company declined to estimate the costs of the data breach in its last earnings report.

Growth strategy misses the target
As if the security breach weren't bad enough, Target is also caught in the middle of a very expensive growth initiative that hasn't panned out yet. For years, Target's stores were located entirely in the United States. With plans to capitalize on international growth potential like its rivals have, Target chose Canada as its new frontier.

It's reasonable for a large retailer with saturated operations in the U.S. to look elsewhere for growth. Wal-Mart operates in 26 countries outside the U.S., which is serving it well as domestic growth has leveled off. Wal-Mart's international operations produced 4.6% sales growth last year, far outpacing its 2.5% total sales growth.

Unfortunately, while Target's Canada operations generated $1.3 billion in sales last year, soaring costs resulted in a $941 million loss in earnings before interest and taxes. Including these items, Target's Canada segment reduced the company's profits by $1.13 per share.

Put simply, Target's Canada unit has had a pronounced negative impact on the company's bottom line. Target as a whole earned $3.07 per share in 2013, but would have earned $4.20 per share if it weren't for the costs associated with expansion in Canada. That means that its growth strategy in Canada diluted shareholders by 27% last year.

Look for updates when Target reports earnings
Target's stock has languished over the past year while the broader market is breaking new highs. Target essentially sat out the market rally last year, and unless it gets its act together it might have a disappointing 2014 as well. The good news is that Target's problems can be fixed. It's hugely important for management to get the two major issues, the security breach and the operational problems in Canada, under control before any meaningful turnaround can materialize.

Target is set to release quarterly earnings later this month. It's absolutely critical for the company to provide substantial updates on the security breach and its ongoing Canadian expansion efforts in order to give investors a sense of confidence moving forward.

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