An Ailing Target, Even Before the Hacking

 | Dec 30, 2013 | 7:00 AM EST  | Comments
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Oh, Tar-jay, you really have blundered this one. After the hacking incident that compromised 40 million Target (TGT) customers' payment data, between Nov. 27 and Dec. 15, management took its sweet old time and waited till Dec. 20 before announcing it. To add a little salt to the wound, Target confirmed Friday that personal identification numbers (PINs) were also compromised. In a blog, it assured customers that the data was highly encrypted, and should be safe and secure -- but, based on the track record of incidents so far, I wouldn't bet any money on that.

Confused? Please take a number in the Target customer-service line queue and we will see you on New Year's Day.

Most analysts are trying to figure out the sales impact of the pre-Christmas-weekend hacking announcement, of the plunging customer-satisfaction levels and of the mounting lawsuits. But, while they do that, let us consider Target's preexisting issues.

First, dilution from the Canada business continues to be one of the largest long-term concerns. Third-quarter dilution was 40% worse than expectations, and the company increased annual dilution by as much as 30%. Current dilution estimates are double the level of the original guidance.

Second, foot-traffic declines accelerated by 130 basis points in the third quarter. Yes, that was worse than Wal-Mart's (WMT) 40-basis-point decline.

Third, while gross margins are expected to rise in the fourth quarter, this is unlikely if the company has any real intentions of winning back a really angry customer. We know how that is done: price, price, price.

Investors have short-term memories for one-off events like these -- for example, TJX's (TJX) security breach in 2007. One-time charges will also eventually fall into the bucket of a distant memory. However, the core issues for Target may have staying power.

One last factoid to throw in here, assuming consumers do in fact decide that the hacking incident is not a passing threat. Target's REDcard penetration is 20%, and those customers shop and spend twice as much as non-REDcard customers do. This, therefore, may become the biggest problem of all.

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