Tuesday, May 6, 2014

Target CEO Change Was Long Overdue

Retailing industry stocks were my institutional research bread and butter for many years, and I followed Target when it was a budding business within Dayton Hudson.  It has been a remarkably successful business, carving out a distinctive niche, while tweaking its merchandise offerings to adapt to changing consumer tastes and trends.

Like many early department store companies, whether public or private, Target is a merchant driven company.  Any initiative that serves the merchants is a good investment from the corporate management, and it was usually good for earnings too.  Merchants don't know, or care, about data security.  That is why the notion of spending millions on data security, which insiders felt was needed as the credit card portfolio expanded, was never considered important.

This attitude is amazing, because in many fundamental ways, Target's success came from being heavily programmed and systematized in things like store formats and their roll-outs.  Nothing was left to chance or to local improvisation.  No detail was too small for corporate attention.  Data security should have been on the radar screen for the board.

Post-data breach, the way Target has handled it has been so abysmal even for a bad retailing company; for an industry leader, it is shocking.  Aside from a full page ad in the Wall Street Journal, and from commiserating with other customers, Target has, to my knowledge, never sent out letters to all their private label and bank debit card customers telling them what happened, how serious it might be, and offering them solutions to protect their accounts. We never got any communication, and our family spends a lot of money at the store; and we replaced our bank cards on our own and received no notice of free credit monitoring, as alleged in newspapers.  I doubt that a large proportion of their customers, excuse me "guests," read the Wall Street Journal.

Unlike the press characterization of the intrusion as being high tech, it seems that it was decidedly low tech. In fact, one of the Target systems actually detected it, but the culture of Target either placed no confidence in their own systems, or the IT department's processes for communicating upward don't work.

Canada has been written about, but these kinds of execution shortfalls in an adjacent market is inexcusable.

The stock price spent much of 2013 in the seventies, before languishing downward to the low sixties in the face of a market fleeing to big capitalization, high quality names.

The problem going forward is this.  Bringing in a retailing star from another company, like Walmart for example, isn't guaranteed to work because of the huge differences in the business models and management cultures. The new CEO would have to spend time sorting out her team while learning where the bodies were buried.  Elevating a top merchant sounds fine, except merchandising is where some of the fundamental mistakes have been made, like going too far upscale with programs that had to be closed out.  Target is having a bit of an identity crisis, and it has been going on for some time.

Financial engineering with real estate and returning money to shareholders wasn't a solution when Pershing Square beat its chest, and that is the same story today, if the company wants to remain a major league player.  At least this change gives the board the opportunity to get things right.  The question will be "Have they left it late?" A dead stock for a while?

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