By Paul Ziobro
Target Corp.'s massive data breach and mounting losses from its
push into Canada took a toll on the retailer's latest quarter.
The earnings report on Wednesday offered the first detailed look
at the financial fallout of the breach and the task ahead as Target
seeks to recover from one of the largest credit-card thefts in
history. It faces more than 80 related lawsuits, including some
from card issuers, as well as federal and state investigations into
how the company responded to the attack.
Target's profit fell to $520 million in the quarter ended Feb. 1
from $961 million a year earlier. Most of the drop was because of
the weak first year in Canada.
Sales fell 3.8% to $21.52 billion. Concerns over the breach kept
shoppers away during the crucial holiday season, leading to a 5.5%
drop in the number of transactions, the largest quarterly decline
since Target began reporting the statistic in 2008.
Target said sales have improved this month and are running
nearly flat with a year ago. The company plans to lower prices and
offer more discounts in an effort to keep shoppers coming back.
"We're going to go out and be more aggressive," Target Chief
Executive Gregg Steinhafel said on a conference call with analysts
Wednesday.
Target's shares rose $3.98, or 7%, to $60.49 on the New York
Stock Exchange. The company had warned about the damage to its
sales, and investors appeared to be relieved that the damage didn't
turn out worse. Wednesday's gain left the company's shares 4.8%
below where they were before Target disclosed the breach on Dec.
19.
Hackers used stolen credentials from a refrigeration contractor
to slip software into Target's computer network that scraped card
data for three weeks beginning Black Friday weekend. The attack
compromised 40 million credit- and debit-card accounts, as well as
the personal data for up to 70 million people.
Discounts needed to persuade customers to keep shopping at
Target could weigh on earnings this year. The company projected it
would earn $3.85 to $4.15 a share this year, excluding any
potential cost from the data breach. Analysts had forecast
$4.15.
Target said it can absorb breach-related costs, which analysts
estimate will reach hundreds of millions of dollars. The company
will cut back stock buybacks to $1 billion to $2 billion this year
from an earlier projection of $4 billion, Chief Financial Officer
John Mulligan said. Some analysts were bracing for a bigger cut.
Target also said it would raise its dividend around 20%.
Target logged $61 million in fourth-quarter expenses related to
the breach, including paying for an investigation, offering
credit-monitoring to customers and staffing call centers. Insurance
picked up $44 million of the costs. Continued costs are expected
dent earnings this year.
The fallout from the breach comes as Target faces other
challenges. Its first international push, into Canada, has faced
mounting losses as the company offered steep discounts to clear
excess inventory. The retailer lost $723 million last year in
Canada, where its gross profit margin was just 4.4% in the fourth
quarter.
Target expects sales in Canada to double this year, now that the
company has a better grasp on how much product to stock and at what
prices. The company expects its gross margin to approach 30% in
Canada, around the U.S. level.
Web-based rivals continue to grab sales from the discounter,
which has been working to build online capabilities that it once
outsourced to Amazon.com Inc. Target said online sales rose more
than 20% but accounted for just around 2% of the total. The company
also continues to wrestle with Wal-Mart Stores Inc., which is
opening smaller stores as shoppers cut back trips to big-box
supercenters.
Write to Paul Ziobro at Paul.Ziobro@wsj.com
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