May 6, 2014
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Target's decision to remove CEO rattles investors

May 6, 2014

Target's decision to oust Gregg Steinhafel as chairman and chief executive some five months after a massive data breach has triggered concerns the No. 3 U.S. retailer might have even more bad news for investors.

The board of directors removed Steinhafel on Monday, saying it wants new leadership to help restore consumer confidence in the No. 2 U.S. discount retailer.

"You got to wonder what prompted it now. What else will come to light," said Dieter Waizenegger, executive director, of CtW Investment Group, which advises union pension funds with about $250 billion under management, including those owning about 3.3 million Target shares.

The massive data breach and last year's misguided push into Canada have already hurt profit and revenue. Analysts and shareholders expect to hear more of the same when the company reports results May 21 for the quarter ended May 3 and worry that the company could disclose other problems as well.

"We would hazard a guess that first-quarter sales continued to be hurt by the data breach aftermath and that the Canada expansion is still in trouble," Carol Levenson, an analyst with bond researcher Gimme Credit, said in a report.

Target's shares fell 3.5 percent to close at $59.87 on Monday, a sign investors were not convinced a change at the top alone would solve the problems facing the company. In the year up to Friday's close, the stock fell 13.8 percent, while the S&P 500 rose 15.6 percent.

A 35-year veteran of the company, Steinhafel, 59, had been CEO since 2008. Just two years ago, the company was celebrated as the "cheap chic" alternative to No. 1 Wal-Mart Stores Inc.

The Minneapolis-based company named Chief Financial Officer John Mulligan as interim chief executive, and Roxanne Austin, a member of the board of directors, as interim non-executive chairwoman of the board.

The company said it hired recruiting firm Korn Ferry to help the board find a new CEO, indicating it is open to finding an outsider to guide it out of its current malaise, rather than pulling its next CEO from its executive ranks as it did when it promoted Steinhafel from president.

FBR Capital Markets analyst Daniel Ives said he believed Steinhafel, who will stay on in an advisory role for a while, is the first CEO to be removed following a major data breach.

The timing of the sudden change in leadership, given all the problems that Target is facing, is hardly ideal, said Moody's Investors Service, the credit rating firm.

"We believe this to be a very inopportune time for a change at the top of Target, given the challenges the company is facing on multiple fronts," Moody's Vice President Charles O'Shea said.

Falling profits

The most pressing tasks facing Steinhafel's successor include fixing Target's Canadian operations. Last year, it opened 124 stores along with three distribution centers in Canada, its first market outside the United States. No retailer has ever opened this many stores at one time in Canada. Nine more stores are planned for 2014.

While the ambitious launch gave Target a hefty market presence immediately, it also created major logistics headaches.

Expenses soared as Target over staffed stores and grappled with what it described as supply-chain congestion. That left many stores with barren shelves and complaining consumers, many of whom have been spoiled by less-expensive choices offered in Target stores just across the U.S. border.

For 2013, the company reported a loss of nearly $1 billion in Canada on sales of $1.3 billion. Overall, the company reported a 34 percent drop in net profit last year to $1.97 billion.

"Clearly, they just weren't prepared," said Maureen Atkinson, senior partner at Toronto-based global retail consultancy J.C. Williams Group.

Target Canada President Tony Fisher was unavailable for comment, but a spokeswoman said the company is making progress.

The problems extend beyond its supply chain, retail experts say. Target underestimated competition from both domestic retailers and its biggest rival, Wal-Mart.

"I think they will get it right in the long run, but they've got a lot of fixing to do," said Atkinson. "Unfortunately, for customers, it's harder to forget than remember.

Breach troubles

Mulligan, the interim CEO, has served as the company's chief spokesman on the data breach, holding up well under scrutiny during Congressional hearings.

Target disclosed the cyber attack in December, revealing the theft of at least 40 million payment card numbers and 70 million other pieces of customer data.

"He has played a key role in the recovery efforts," said Target spokeswoman Dustee Jenkins.

The impact of the breach is expected to have extended into the first quarter of the year. Analysts on average expect the company to report a decline of about 1 percent in first-quarter sales at established stores when it releases results in two weeks, according to Thomson Reuters I/B/E/S.

"The Canadian component of the story is salt in the wound, but it is by no means the wound," said Jim Danahy director of the Centre for Retail Leadership at York University in Toronto. "The wound for this company is without question the security breach."

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