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Home Depot Data Breach is a Home Wrecker

Home Depot (NYSE: HD  ) may be the home of orange aprons, but more than a few of its customers may be about to start seeing red. Home Depot stock took a hit on Tuesday September 2, 2014 after a spokeswoman confirmed that the home improvement superstore chain is investigating a potential data breach.

The Home Depot data breach report originally surfaced on Krebs on Security -- a little more than halfway through the trading day -- pointing out how many banks were singling out Home Depot stores as a source of a "massive" data breach exposing credit and debit card information. Krebs on Security also goes on to say that signs point to the breach being the same handiwork of the same group of Russian and Ukrainian hackers that made lives miserable for Target (NYSE: TGT  ) shoppers during last year's holiday shopping season. 

Here's where things get thorny for Home Depot. We saw what the breach did to Target. Shoppers stayed away from the cheap chic retailer, and those that still crossed off their holiday shopping lists at the discount department store chain tried to avoid swiping plastic to complete the transaction. Even after taking the drastic measure of marking down the entire store -- offering a 10% discount to all shoppers during the final weekend of the holiday shopping season -- comps took a hit.

Target wound up suffering a 2.5% dip in comparable-store sales, and giving away the store resulted in a 21% plunge in earnings. Even now, nine months after the brand-blasting breach, comps have yet to bounce back at Target. Is Home Depot the next major retailer to let hackers send loyal customers scurrying for alternatives?

Home Depot data breach is serious stuff
Home Depot can't afford to slip. It's rolling these days. It clocked in with a 6.4% spike in comparable-store sales for its stateside superstores in its latest quarter. If the do-it-yourself giant's data breach scares away shoppers it would do a lot of damage to the chain's brand and its near-term financials performance.

The silver lining for Home Depot investors is that it's not Target. Holiday shoppers could have filled their carts with toys, clothing, and holiday decor items from dozens of other retailers if they wanted to steer clear of the store with the red bullseye on the front. They had enough time to snag even lower prices online. 

If someone needs an emergency generator after a power outage or a contractor needs a half dozen ceiling fans are they really going to keep driving past their nearest Home Depot store? There are rivals, smaller hardware stores, and contractor specialty shops, but in a pinch Home Depot will have to do. If anything shoppers may feel safer handing over their credit and debit cards to the cashier at Home Depot because it's under the microscope as it investigates the possible data breach.

Investors will still want to keep an eye on how things play out this quarter. It's no longer just fears that the housing boom is starting to cool down that will weigh on the minds of Home Depot investors.

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Rick Munarriz

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he now lives a block from his alma mater.

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8/27/2015 4:00 PM
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Home Depot CAPS Rating: ****
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