Target Puts Data Breach Costs at $148 Million, and Forecasts Profit Drop by Rachel Abrams

07/08/2014 21:40

Target, still feeling the pain from a huge data breach last year, said in a security filing on Tuesday that costs associated with the episode reached $148 million in the second quarter.

The company also said it expected earnings to drop to 78 cents a share from its earlier projections of 85 cents to $1 a share, reflecting more cautious consumer spending.

In the filing, John Mulligan, Target’s interim president and chief executive, said the company has been committed to being open about the costs. “With the benefit of additional information, we believe that today is an appropriate time to provide greater clarity on this topic,” he said.

In December, Target disclosed that online thieves hacked into its computer system, stealing credit card or personal information from more than 100 million customers. Both personal data and credit card information may have been stolen from about 12 million people.

The company has already spent tens of millions of dollars on breach-related costs since then. In January, Target announced it would offer a year of free credit screening services to any customers who believe their data may have been compromised by the attack.

John Kindervag, the vice president and principal analyst with Forrester Research, estimated that costs would rise even more over time. “I don’t see how they’re getting out of this for under a billion, over time,” he said, adding, “$150 million in a quarter seems almost like a bargain.”

Target also acknowledged some fault for the attack. In the months that followed, the company said it had missed certain warning signs about potential security gaps. As a result, Gregg Steinhafel, the former chief executive, resigned in May.

Last week, the company announced that it had appointed Brian Cornell, who most recently served as chief executive at PepsiCo Americas Foods, as the company’s next chairman and chief executive. He will take up his new roles next week.

The $148 million in breach-related costs will be partly offset by a $38 million insurance payout, the company said in its filing. In the past, the company has attributed some of the breach-related costs to legal, consulting and credit monitoring services.

Target continues to struggle elsewhere, including in its expansion into Canada. The retailer quickly opened more than 100 locations, but reported disappointing profit margins, one reason the company cited for its sagging second-quarter projections.

“While the environment in both the U.S. and Canada continues to be challenging, and results aren’t yet where they need to be, we are making progress in our efforts to drive U.S. traffic and sales, improve our Canadian operations and advance Target’s digital transformation,” Mr. Mulligan said.

Target shares closed down 4.4 percent, at $58.03. The company will announce earnings for the second quarter this month.

“I think investors are probably not going to be too thrilled with this,” Mr. Kindervag said. “They’re really in a difficult place. It’s going to take them a long time to build the trust of the shopper and get them to where they were prior to December 2013.”