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Target Corp – Quantifying The Breach…

January 15th, 2014 Comments off

There’s certainly been no shortage of press about the recent Target breach and the number of customers it has affected. The first estimates for the breach placed the list at 40 million customers, but later revisions put this number closer to 70 million. One of the most destructive aspects of the breach is that it occurred in the midst of the most critical part of the retail year….Holiday sales. While any breach like this will certainly take time to recover from, having it happen at such a critical time will cost Target dearly.

Let’s start with the recent reduction in their earnings estimate. For the 4th Quarter alone, Target reduced their estimates from a high of $1.60 down to a potential low of $1.20. With 632 million shares outstanding, this is a miss of $250 million alone. That is just the estimated miss for this Quarter alone! This will likely not be the only downward revision as Target will need to assess the impact to future Quarters.

From a revenue perspective, Target had originally been estimated to generate revenues in the +1-2% range, which would have put them in the $23.2 billion range. As a result of the breach, revenues were estimated to be in the (4%)-(6%) range, or approximately $21.8 billion. This is a $910 million reduction in revenues!

Next up is the cost to cover consumers for additional credit protection. At shelf rates of $15-19/mo for credit monitoring it’s easy to see how these costs will add up as well. For myself, I have had this offered to me in the past but passed since I already have this tool in place. I’m not sure on statistics, but Target will not need to cover all affected parties.

From a more macro perspective, banking industry studies estimate that the cost to cancel and reissue cards is approximately $100 per account. Further, it’s estimated that the total costs for a breach are estimated at approximately $200 per account. With the amount of folks affected, between 40-70 million, you get a range of $4 billion to $14 billion in total costs related to this breach, not all of which will be carried by Target, but still massive. While the estimates above are an all-in, it’s frightening to think of the additional class action lawsuits, legal fees, and IR & Forensic fees that will be incurred to clean this up.

Non-financial costs? Consider the deterioration in goodwill resulting from the breach and the number of customers that are now avoiding Target as their shopping destination due to recent security concerns. There’s no doubt the recovery costs are massive and it’s certainly changing the point of view by companies to appropriate the necessary spend to ensure they’ve mitigated as much system risk as possible.

Thanks for reading…

Jeffrey Ishmael

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