Target Downgraded by S&P After Data Breach Crimps Profit

Target Corp., the second-largest U.S. discount retailer, had its debt rating cut by Standard & Poor’s after a hacker attack and sluggish performance at its Canadian unit squeezed fourth-quarter profit.

The rating was dropped one level to A, the sixth-highest investment grade, from A+, S&P said yesterday in a statement. The ratings firm has a stable outlook on Target, which ranks second to Wal-Mart Stores Inc. in the discount-retail industry.

The retail chain suffered a data breach at the height of the holiday season last year, allowing hackers to steal card data and personal information from millions of shoppers. Even as Chief Executive Officer Gregg Steinhafel worked to reassure customers, the attack took a toll on fourth-quarter results, contributing to a 46 percent drop in net income.

“We expect the data breach to have a somewhat lingering effect on customer traffic at least through the first half of fiscal 2014, but this should moderate over time,” Ana Lai, an analyst at the New York-based ratings firm, said in the report. “While the costs related to the data breach are difficult to forecast, we believe these expenses could be significant but manageable given Target’s good cash flow generation.”

Target’s stock was little changed in yesterday’s trading, closing at $59.98 in New York. Shares of the Minneapolis-based company have dropped 5.2 percent so far this year, compared with a 0.5 percent gain for the S&P 500 Index.

The retailer’s bonds, meanwhile, have gained 4.45 percent in 2014, outperforming the 3.78 percent rise among peers in the Bloomberg U.S. Corporate Bond index. Target has $11.7 billion of obligations outstanding, with about $1 billion of debt coming due this year.

Canada Woes

In addition to suffering the data breach, Target had a bigger-than-expected loss at its Canadian division, S&P said. Earnings before interest, taxes, depreciation and amortization fell to $6.1 billion in the last fiscal year, missing S&P’s estimate of about $6.7 billion. Target’s debt leverage increased to 2.5 times in fiscal 2013, compared with the ratings firm’s prediction of 2.3.

Target testified before a U.S. Senate panel this week about the hacker attack and why the company took weeks to respond to the threat. The hearing followed a report by Bloomberg Businessweek that found Target ignored warnings from its hacker-detection tools, leading to a breach that compromised 40 million credit card numbers -- along with 70 million addresses, phone numbers and other pieces of personal information.

“We are asking hard questions about whether we could have taken different actions before the breach was discovered that would’ve resulted in different outcomes,” Chief Financial Officer John Mulligan told the panel this week.

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