February 24, 2014 / 8:15 PM / in 5 years

Data breach costs seen crimping Target's firepower for buybacks

NEW YORK (Reuters) - Several analysts expect Target Corp (TGT.N) to slash its share buybacks as the third-largest U.S. retailer copes with costs tied to the massive data breach that affected millions of customers.

The sign outside the Target store is seen in Arvada, Colorado January 10, 2014. REUTERS/Rick Wilking

Target had originally planned to buy back up to $4 billion of shares this year, but analysts do not expect it to achieve that goal as it sets aside money to deal with the data breach and try not to borrow more so it can maintain its credit rating.

When Target reports quarterly results on Wednesday it will mark the first time that it faces Wall Street since the breach, which led to the theft of about 40 million credit and debit card records and 70 million other records with information such as addresses and phone numbers of shoppers compromised.

The security breach “could crimp their repurchase activity,” said Telsey Advisory Group analyst Joe Feldman. “That’s definitely a concern of a lot of investors.”

Target spokesman Eric Hausman said the company remains committed to share repurchases over time and “will govern the pace of repurchases with the goal of maintaining our strong A credit rating,” but did not comment further ahead of its fourth-quarter earnings release.

Any move to curb repurchases could make the retailer’s stock less attractive to investors over the near term.

Fitch Ratings analyst Philip Zahn said he did not expect Target to be aggressive with share repurchases as the company would have to take on additional debt to do so and that could end up costing Target its current credit rating.

The retailer already has lowered expectations for the fourth quarter, in part due to weaker-than-expected sales since reports of the cyber-attack emerged in mid-December. News of the breach has hurt its reputation and stock.

Target has yet to tell investors how much it has spent on dealing with the fallout from the breach. Some analysts estimate the breach will cost Target $500 million to $1.1 billion.

Target will likely incur costs tied to reissuing cards, bank settlements, credit monitoring, and enhancing security systems, but will not have to replace all cards or make large-spread hardware replacements, Wells Fargo’s Matt Nemer noted.

Feldman, like some other analysts, urged investors to abandon Target and invest in Dollar General (DG.N) and Dollar Tree (DLTR.O) instead, citing better growth prospects and the assessment that the cloud of uncertainty around Target is not going away soon.

Analysts have cut Target profit estimates for the fiscal years ending January 2014 and January 2015 by about 12.2 percent and 9.5 percent, respectively, since December 18 - the day before the company confirmed the breach, Thomson Reuters Starmine data showed.

Nemer, who has an “outperform” rating on Target, said the retailer’s goal of $4 billion in repurchases in 2014 “seems out of reach” but he still believes the company has the capacity to fund about $2 billion in buybacks if breach-related costs are in the hundreds of millions and not higher.

Last year, the company had set a goal of repurchasing up to $4 billion of its shares annually in 2014 and beyond.


Target, whose consumer perception scores had dropped to their lowest level since 2007 after the breach, is also likely to face tough questions on how it plans to win back shoppers.

The “focus will likely be on Target’s 2014 strategy to earn back guest trust and share of wallet,” said Cowen analyst Faye Landes, who recently downgraded Target’s stock.

Some want to know if the breach had a lingering effect on sales and if the related costs will affect Target’s plans for Canada and to test shipping directly from stores.

“They have a lot of stuff to work on,” said Stifel Nicolaus’ David Schick, who picked Costco shares (COST.O) over Target.

“Can they get Canada to turn? Can they become as powerful in ecommerce and omnichannel as they were in retail five or ten years ago? Can they re-emerge as a merchandising powerhouse?” Schick said, while detailing Target’s strategic issues.

Reporting By Dhanya Skariachan; Editing by Bernard Orr

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