Does Target's CEO Departure Signal 1Q Earnings Pain?

NEW YORK (TheStreet) - Target (TGT) made big news on Monday when it announced that its CEO Gregg Steinhafel  was forced to resign as the reverberations from last year's data breach continue to rock the retailer.

But what does that mean for Target's first-quarter earnings?

For the moment, Target's CFO John Mulligan has been appointed interim president and CEO while board member Roxanne S. Austin will take on the position of interim non-executive chairwoman. The Minneapolis-based company said both executives will remain in their new roles until permanent replacements are announced.

So, now that all the top executive positions are covered, we're left to determine why all of this unfolded. One explanation says that the company has never really dealt with the data spill, and that finally, something had to be done.

Target "likely thought they could ride out their initial malaise in action, but the anger, resentment and pocketbook disobedience by customers called for a dramatic public symbol -- and out came the target guillotine," Eric Schiffer, chairman of ReputationManagementConsultants.com, an Irvine, California-based brand agency, said in an e-mail. Schiffer added that it's "highly probable" the company's second quarter earnings will fall below expectations.

The massive data breach over the holiday season may have affected as many as 110 million customers. It most certainly did generate lots of negative headlines. For Target's fourth-quarter earnings, Steinhafel had said that while sales had started to recover, the data breach had "shaken" customers' confidence in the store. Of course, it apparently also shook the board's confidence in Steinhafel.

"Target has not emotionally reconnected with customers, there is still this sense of worrying unknown each time a card is swiped," Brian Sozzi, CEO of Belus Capital Advisors and a contributor to TheStreet, writes in an email. "I expect pain within Target's earnings for the first quarter. I just don't think you could expect that recovery type quarter given the news flow over the past months."

Target is set to report first-quarter earnings on May 21.

Analysts, according to Thomson Reuters, expect the company's first-quarter earnings to fall 12% to 72 cents a share. Revenue is expected to rise 2% to $17.04 billion. The company said in February that it expected first-quarter sales comps to be flat to down 2%. But with a particularly difficult winter keeping consumers at home, it's likely that Target suffered even more given customer reluctance to shop there.

Over the three months to Feb. 1, the retailer earned $520 million, or 81 cents a share, down from $961 million, or $1.47 a share, in the year-ago quarter. Analysts had expected 79 cents a share, according to Yahoo! Finance.

"Target clearly took a hit from the security breaches in the all-important fourth quarter as its 4Q13 same store sales fell 2.5% reflecting the company's worst performance since the second quarter of 2009 at the height of the Great Recession," Retail Metrics Ken Perkins writes in an email. "Moreover its same store sales were 340 basis points below our total Retail Metrics SSS Index in the fourth quarter of 2013. This was not however the first quarter of underperformance for Target. Target missed the mark in 4Q12 with the introduction of its Neiman-Marcus upscale collection along with other apparel missteps more recently have hurt sales. Target has been adversely impacted by the lack of wage gains by lower and middle income consumers as well. [First quarter 2014] is expected to be more of the same."

In its statement, Target praised Steinhafel's work navigating the financial recession, handling challenges during the company's expansion into Canada and his defense of the company in a proxy battle.

"Most recently, Gregg led the response to Target's 2013 data breach. He held himself personally accountable and pledged that Target would emerge a better company," the company said. "We are grateful to him for his tireless leadership and will always consider him a member of the Target family."

"The last several months have tested Target in unprecedented ways," wrote Steinhafel, in a letter to the company's board. "From the beginning I have been committed to ensuring Target emerges from the data breach a better company, more focused than ever on delivering for our guests. We have already begun taking a number of steps to further enhance data security, putting the right people, processes and systems in place. With several key milestones behind us, now is the right time for new leadership at Target."

Piper Jaffray analyst Sean Naughton, who has an "overweight" rating on the stock, said the management change is not surprising, "but the timing is earlier than anticipated," according to a research note.

"We do not view today's announcement as a direct result of the data breach or disappointing Canadian results. Rather, it is the culmination of several issues (initial problems with internal e-commerce launch, Canada, data breach, etc.) that have resulted in challenging same-store sales trends and market share losses," the note says.

"Given the announcement happened the first business day after the end of the first quarter, we would not view today's announcement as a favorable indicator of Q1 sales and earnings. That said, the company did not revise guidance lower, which would suggest results are in-line with guidance: (2%) to flat comps and $0.60 to $0.75/share in EPS. Net-net, we interpret today's announcement as an indicator that trends remain challenging, but likely in-line with the company's guidance, albeit toward the lower end," Naughton writes in a note.

Sterne Agee's Charles Grom agrees. "The move is clearly not a vote of confidence regarding: near-term sales trends and progress in Canada," Grom writes.

"On the positive side, clearly change was needed at Target. To this point, over the past ~10 years the company has placed big investments on a number of fronts, including: P-Fresh remodels, 5% Red Card, and deep investments in Canada," the note said. "We would argue that these investments have not delivered the returns that the company originally expected, which has led to significant deterioration in the company's brand equity and uninspiring traffic/frequency trends. In retrospect, the company may have been better served developing a world-class omni-channel/Internet presence, which it severely lacks today to compete with multiple retailers on a number of fronts."

--Written by Laurie Kulikowski in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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