Friday, February 28, 2014

Target Credit Card Breach Hits the Boardroom

By Jim McFarlin

Some predictions do come true.

The question raised in this September post, Will 2013 Be the Year Cybersecurity Crashes the Party in the Boardroom? was late happening. Then on December 17th, in the midst of retail’s most critical sales season, reality crashed through Target’s boardroom in the form of one of the largest credit card heists in history.

Following the loss of credit card information belonging to 40 million customers and personal data of another 70 million customers, Target now faces massive expenditures to remedy the breach and shore up its cyber defenses to prevent repeat thefts in the future.

Dealing with such remedial action is not coming cheaply. According to the February 27th issue of The Wall Street Journal, Target’s fourth quarter profit fell from nearly a billion dollars a year earlier to just over $500 million in 2013’s fourth quarter, knocking nearly two billion dollars from its market capitalization.

But such financial shortfalls are just the beginning of Target’s troubles. Here are three more dampers on the company’s financial picture:

Lawsuits and investigations: Target faces more than 80 related lawsuits, including some from credit card issuers. The legal fees and settlements from these suits will total unknown levels, casting increased uncertainty on Target’s future sales and profits and adding to investor unease. The company is also the subject of several state and federal investigations into how Target handled the attack.

An uncertain future: There are too many unknowns in Target’s future as a result of this breach. Technology research firm Gartner places the cost of the breach between $400 million and $450 million – and these figures may be low. Based on research of similar breaches from other firms, the typical cost ranges from $0.90 to $3.20 per affected record. Even at the lowest level, this places Target’s financial exposure in the billions.

Indicative that Target sees serious trouble looming ahead, the company has indicated it will cut back its stock buyback program from an estimated $4 billion to between $1 and $2 billion.

Permanent customer drain: Target has a credibility repair effort ahead that will take time. Meanwhile, customer growth will also be impacted by online shopping options, such as Amazon, which customers may see as a safer option against personal and identity losses. Target is a pool cousin in this game, having only 2% of its sales derived from online revenues.

Remedies for thefts such as these are in sight, but do not come soon enough. Credit card issuers will be giving retailers until October 2015 to switch from the current magnetic stripe technology of the 1960s to the new chip-based technology popular in Europe. And not to be deterred from the riches of America’s retail market, cyber criminals will create workarounds to such new technology.

They even know how much time they have.

And still, there are more unknown expenses for Target to ponder.

One can only imagine that the party balloons and festive celebratory drinks from Target’s boardroom at the fiscal year-end of 2013 have since been replaced in the New Year by gloomy charts depicting declining business forecasts and Alka-Seltzer.

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