Target: Data Breach, Flat Sales Will Impact Q2 Results

Target Corp. has announced that it expects second quarter financial results to include gross expenses of $148 million, partially offset by a $38 million insurance receivable, related to the data breach that occurred in December 2013. The expenses include an increase to the accrual for estimated probable losses related from what the company estimates to be the vast majority of actual and potential breach-related claims, it related.

Further, Target stated that it anticipates second quarter 2014 adjusted earnings per share to come in at about 78 cents versus prior guidance of 85 cents to $1 per share.

The new earnings estimate, Target stated, reflects basically flat comparable sales in the United States, with lower-than-expected EBITDA margin driven by promotional markdowns, and somewhat softer-than-expected sales in Canada, as well as continued investments to clear excess inventory there.

The retailer maintained that second quarter 2014 GAAP EPS would be about 41 cents lower than adjusted EPS, reflecting net pre-tax data breach expenses including an increase to the accrual for estimated probable losses, pre-tax early debt retirement costs, an expected reduction of the beneficial interest asset related to the sale of the company’s credit card portfolio, and pre-tax impairment losses on undeveloped U.S. land.

“Since the data breach last December, we have been focused on providing clarity on the company’s estimated financial exposure to breach-related claims,” said John Mulligan, Target interim president and CEO, CFO, in announcing the financial developments. “With the benefit of additional information, we believe that today is an appropriate time to provide greater clarity on this topic. 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. With last week’s announcement that the board has chosen Brian Cornell as Target’s next chairman and CEO, we are excited to welcome Brian to the team and committed to working together to accelerate Target’s transformation and become a leading omnichannel retailer.”

During fourth quarter 2013, Target suffered a data breach in which an intruder gained unauthorized access to its network and stole payment card and other customer information. Despite its initiatives to account for the effects of actions resulting from the breach, Target acknowledged that, given the varying stages of claims and related proceedings, and the inherent uncertainty surrounding them, estimates involve significant judgment based on currently available information, historical precedents and an assessment of claim validity. Estimates may change as new information becomes available, Target pointed out, and may incur a material loss in excess of the amount accrued to offset them.

In second quarter 2014, beside breach-related matters, Target completed tender offers that paid out $1 billion to retire, at market value, $725 million of its long-term debt. As a result, the company incurred a pre-tax loss of $285 million, or 27 cents per share, which it will recognize as net interest expense, according to the company.