Target’s Credit Card Debacle Warrants More Concern from Investors

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Target (NYSE: TGT) continues to be the subject of scrutiny following a major data breach that occurred in December 2013. Earlier in December, the retailer announced that about 40 million debit and credit cards had been compromised by a massive security breach. It has since been confirmed that the data breach, which happened between Nov. 27 and Dec. 15, affected some 70 million customers. In addition to credit card information, personal data-including names, telephone numbers, mailing addresses- was also stolen.

The news on the data breach spooked shoppers, leading to lower than expected sales in the second half of December. Along with this, Target cut its earnings estimates for Q4 2013. It now expects its U.S. business to earn between $1.20 a share and $1.30 a share during the fourth quarter, down from prior guidance of $1.50 a share to $1.60 a share.

Interestingly, however, Wall Street seems unmoved by Target’s security breach. The nation’s second largest retailer’s stock has held its ground, trading between $61 a share and $63 a share ever since the data breach was first announced.

Investors view the negativity as a unique ‘buy’ opportunity, with analysts arguing that the stock presents significant upside should Target get through the dark phase. Despite this compelling argument, however, investors need to rethink their stance. Target’s credit card debacle could have hit the company harder than imagined.

Broken Value Chain And Bungled Strategy Are Red Flags

Target’s unprecedented security breach has far reaching effects. It is now apparent that the retailer’s payment partners could face fines. The companies that help Target process payments could be hit with fines running into millions of dollars.

Boston attorney Cynthia Larose of Mintz Levin remarked that Target would likely seek to add its partners as defendants to lawsuits already filed over the breach. “These class-action lawsuits start to bring everyone in at some point,” she pointed out. If and when this happens, Target will have to go a long way to repair relationships with partners in its value chain, which is the chain of activities a firm goes through in order to deliver a product or service. This could attract huge costs, putting a drag on future earnings and more notably, limiting upward movement in the stock market.

The security breach also reduces Target’s strategic edge. Online shopping is currently in the vogue and research from multiple sources show that online retail sales will continue to gain traction in the coming years, ultimately eclipsing physical shopping. In light of this, retailers need detailed personal information on shoppers in order to present unique online shopping experiences. Target’s data breach, however, compromised shoppers’ personal information (telephone, address). This could negatively impact consumers’ propensity to fill in forms or participate in online surveys, limiting the amount of personal information that Target acquires on its customers. Furthermore, Target will have to spend more money reassuring consumers in the future that their personal information is safe. These added costs could yet again impact earnings growth, leading to limited upward movement on the stock market.

Author represents that he has no position in any stocks mentioned in this article at the time this article was submitted.