Jan. 11 (Bloomberg) -- The challenges are piling up for Target Corp. Chief Executive Officer Gregg Steinhafel.
Yesterday the company said a security breach affected more people and more information than previously thought and included personal data collected over several years. The breach hurt holiday sales, and Target cut the fourth-quarter forecast for its U.S. operations.
Moreover, the discount chain that captured a broad swathe of Americans with its Bull Terrier mascot, edgy television commercials and cheap chic vibe is barely growing in the U.S. A move into Canada has received a cold shoulder from consumers there. The retailer is late to an industrywide rush to open small, urban stores to capture sales from the millions of people moving to the cities. And with rivals mimicking its playbook, “Tarjay” is losing its cachet.
“They’ve lost the cultural mystique they had five or 10 years ago as being a fashion arbiter,” said Leon Nicholas, an analyst for Kantar Retail in Boston. “Yeah, they still have it with moms, but not so much with the younger generation. They are no longer the go-to source of what’s cool.”
Now, Steinhafel must persuade customers that their personal, debit- and credit-card information is secure. Yesterday, the Minneapolis-based company said names, home and e-mail addresses for as many as 70 million people were stolen. It previously said credit- and debit-card data of 40 million accounts was taken. It’s likely the two groups overlap, though it’s unclear to what extent, Molly Snyder, a spokeswoman, said in an interview.
“Target has sort of lost a bit of its way in the past year or so,” Nicholas said. “They’ve had traffic declines all this year. There have been multiyear declines and fewer shoppers overall.”
The company may need to “re-orient” management to “own the narrative again,” he said. “They can do it. But these are tough times for Target.”
In the third quarter, sales at the website and stores open at least 13 months rose 0.9 percent. Analysts estimated a 1 percent gain. Companywide revenue rose 1.9 percent to $17.3 billion, trailing the $17.4 billion average projection.
The data breach couldn’t have come at a worse time -- smack in the middle of the Thanksgiving-to-Christmas shopping season. Holiday sales were “meaningfully weaker” after the theft was disclosed, the company said yesterday. U.S. same-store sales will fall about 2.5 percent in the quarter through January, compared with an earlier projection they would be little changed. Adjusted earnings per share will be $1.20 to $1.30 for the division, down from a previous estimate of at least $1.50.
In the past, retailers including TJX Cos. have shrugged off the impact of data breaches after a couple of months. Now, however, such revelations go viral on the Web.
“Having been in branding for almost 20 years now, I often think these things are overstated,” said Russ Meyer, a New York-based global director of strategy and insights for brand consultant Siegel & Gale. “But this may have a bigger effect because it goes to the fundamental of retailers and trust.”
What’s more, Target’s revelations keep coming, which prolongs the story and potential damage, he said.
The recent turmoil is one of the biggest tests of Steinhafel’s leadership since he took over as CEO in May 2008 after almost three decades with the retailer, dating back to when it was Dayton Hudson Corp.
In his earlier positions in the company’s merchandising operations, he played a key role in helping Target differentiate itself from Wal-Mart Stores Inc. in the early 1990s by revamping its selections and marketing to appeal to higher-income shoppers. It also decided to match Wal-Mart’s prices on similar items.
“We were going to re-create ourselves and take a decade trying to build this Tarjay franchise, a franchise that is more upscale and that redefines the battlefield,” Steinhafel said during a presentation in 2009 at the University of Notre Dame’s Mendoza College of Business.
The Milwaukee native and graduate of Northwestern University’s Kellogg Graduate School of Management has led the retailer to sales gains in every year of his tenure, even eking out increases during the most recent U.S. recession, while boosting profit in every year except the fiscal period ended in January 2009.
Still, Target’s shares have only gained 18 percent since the day before he grabbed the reins, lagging the 33 percent increase for the Standard & Poor’s 500 Index and Wal-Mart’s 35 percent advance.
Steinhafel, 58, is one of the highest paid CEOs in retail, receiving $20.6 million in Target’s most recent fiscal year from a combination of salary, stock awards and other pay. That almost matched the $20.7 million Wal-Mart CEO Mike Duke, who is retiring, received for running a retailer with six times as much revenue in the same year.
Yet on his watch, Target has remained a cautious company, taking baby steps where other retailers plunge in. That helps explain why the company has been so slow to open urban outposts. Of its almost 1,800 U.S. stores, eight are small-format CityTargets.
Cities are growing faster than suburbs and exurbs for the first time in decades, and they’re generally filled with younger, more free-spending residents, as well as college students and tourists. Smaller stores also make economic sense in the era of online shopping.
While Target is a natural fit in any big city, finding the right locations downtown is more challenging than in the wide-open suburbs. The logistics of stocking stores without massive loading docks are complicated. Merchandise has to be selected to fit smaller spaces. There’s little or no parking.
Still, Wal-Mart has been experimenting with smaller stores for more than a decade; chains from Staples Inc. to Kohl’s Corp. are doing the same.
The pace at which Target is “opening new CityTargets is not going to move the dial,” Poonam Goyal, a Bloomberg Industries analyst, said in a phone interview. “They should be moving faster, but they’re not because the logistics and distribution network is not there yet.”
The chain isn’t opening any city stores this year in order to take time to evaluate what’s working, Chief Financial Officer John Mulligan said in a telephone interview. If the company can shrink the city-store concept into smaller spaces it would open many more possible opportunities, he said.
“We have never been one to drive sales for sales sake,” Mulligan said. “We have never been one to grow quickly in order to grow quickly. We ensure that we are growing properly and making good investments that will ultimately provide superior returns for our shareholders.”
Target depends on the U.S. for almost all of its sales and is largely absent internationally. The sole exception is Canada, which the company entered with much fanfare last year. It wasn’t long before Canadians discovered that they could get the same merchandise cheaper at Target stores across the border than at home. To make matters worse, local chains and Wal-Mart cut their prices before Target opened stores there, with Wal-Mart dropping prices on 10,000 products in July 2012.
With merchandise not moving as quickly as Target had projected, the retailer has slashed prices to clear out unsold inventory. That hurts its gross margin, or the portion of revenue left after subtracting the cost of goods sold. Target’s gross margin on sales in Canada was 14.8 percent in the third quarter, less than half of the companywide margin of 30 percent.
“While our initial sales and profits in Canada have not met our expectations, we remain enthusiastic about the Canadian market and confident in the long-term success of these stores,” Steinhafel said on an analysts’ call in November.
Target’s cautious nature extends to technology. The retailer has been slow to mesh the operations of its physical stores and website. While rivals from Sears Holdings Corp. to Wal-Mart have for years let customers pick up online orders at stores, Target began offering the service this holiday.
Steinhafel said on an October teleconference that the company was working to improve more quickly.
“We’re moving to a more rapid test and learn approach to innovation in which we explicitly consider the trade-off between speed and perfection to drive change more rapidly,” he said.
In the past, Target made a virtue of teaming up with designers and more upscale partners. Lately, it has missed the mark. Last year, the chain spent heavily to advertise a joint holiday collection with luxury department-store chain Neiman Marcus Group Inc. that featured items from designers such as Tory Burch and Diane von Furstenberg ranging from $8 wrapping paper to a $500 bicycle. Within weeks, Target had slashed prices by as much as 70 percent to move the merchandise.
To boost sales, Target will probably be “much more” aggressive in Canada this year, Perry Caicco, an analyst for Canadian Imperial Bank of Commerce in Toronto, wrote in a note yesterday.
“They need to change course in 2014,” said Nicholas, the Kantar analyst. “We’re going to see a little less caution. Their internal tagline is ’fast, fun, friendly.’ I think we’re going to see more emphasis on ’fast’ to gain back their mojo of being a cultural marker.”
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