Target Corporation (NYSE: TGT) announced today that the Company's second quarter financial results are expected to include gross expenses of $148 million, partially offset by a $38 million insurance receivable, related to the December 2013 data breach.
These expenses include an increase to the accrual for estimated probable losses for what the Company believes to be the vast majority of actual and potential breach-related claims, including claims by payment card networks.
In addition, the Company provided an estimate of costs related to its recently-completed early debt retirement and updated expectations for second-quarter Adjusted1 and GAAP earnings per share.All earnings per share figures refer to diluted earnings per share.
"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, Interim President and CEO, CFO of Target Corporation. "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," continued Mulligan. "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."
Update on Expenses Related to the Data Breach
During fourth quarter 2013, Target experienced a data breach in which an intruder gained unauthorized access to its network and stole certain payment card and other guest information. In second quarter 2014, the Company expects to record gross breach-related expenses of $148 million, partially offset by the recognition of a $38 million insurance receivable. Expenses for the quarter include an increase to the accrual for estimated probable losses for what the Company believes to be the vast majority of actual and potential breacential breach-related claims, including claims by payment card networks. Given the varying stages of claims and related proceedings, and the inherent uncertainty surrounding them, the Company's estimates involve significant judgment and are based on currently available information, historical precedents and an assessment of the validity of certain claims. These estimates may change as new information becomes available and, although the Company does not believe it is probable, it is reasonably possible that the Company may incur a material loss in excess of the amount accrued. The Company is unable to estimate the amount of such reasonably possible excess loss exposure at this time. The accrual does not reflect future breach-related legal, consulting or administrative fees, which are expensed as incurred and not expected to be material in any individual period.
Update on Second-Quarter Debt Retirement Costs
In second quarter 2014, Target completed tender offers in which the Company paid $1 billion to retire, at market value, $725 million of its long-term debt2 . As a result, the Company incurred a pre-tax loss of $285 million, or (27) cents per share, which will be recognized as net interest expense in Target's second-quarter Consolidated Statements of Operations.
Update on Second Quarter EPS Outlook
The Company now expects its second quarter 2014 Adjusted earnings per share (EPS) will be within a range around $0.78, compared with prior guidance of $0.85 to $1.00 per share, reflecting:
U.S. Segment: Essentially flat comparable sales with lower-than-expected EBITDA margin driven by promotional markdowns, as guests continue to spend cautiously and focus on value in the current environment, and;
Canadian Segment: Somewhat softer-than-expected sales combined with the impact of continued investments to clear excess inventory.
Second quarter 2014 GAAP EPS is expected to be approximately 41 cents lower than Adjusted EPS, reflecting:
Net pre-tax data breach expenses of $111 million, or (11) cents per share, which includes an increase to the accrual for estimated probable losses;
Pre-tax early debt retirement losses, recognized in interest expense, of $285 million, or (27) cents per share;
Approximately (1) cent related to the 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 of $16 million, or (1) cent per share.