Target replaces chief executive Gregg Steinhafel Monday, removing a 35-year “lifer” who won plaudits for his merchandising ability but whose tenure was marred by a massive data breach over the holidays. WSJ’s Paul Ziobro explains on MoneyBeat. Photo: AP
A Christmas-season cyberattack on Target Corp.’s TGT +0.85% computer systems did more than expose massive amounts of customer credit-card data to potential fraud. It also turned up the heat on deeper troubles that simmered under the six-year tenure of Chief Executive Gregg Steinhafel, who stepped down on Monday.
Among the missteps: An expansion into Canada that verges on disaster and an e-commerce strategy that hasn’t gained momentum. But perhaps most of all, the cheap-chic “Tar-zhay” formula isn’t bringing in customers the way it used to.
By the time Target’s board met April 17, the “accumulation of challenges and frustrations” among directors and Mr. Steinhafel alike became “really high,” according to one person familiar with the situation. By last week, these frustrations had turned into a focus on a “fresh start at the top,” the person said.
The resignation is effective immediately.
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Mr. Steinhafel, after spending 35 years at the discount retailer, will collect an exit package estimated to be worth $37.8 million, based on Target’s Monday closing share price, including cash severance and accelerated vesting of stock, calculates Mark Reilly, a compensation consultant at Verisight Inc., who has never advised Target.
Target declined to comment on the severance package.
The biggest worry for some Target directors and executives was the pending conclusion of a comprehensive report on the data breach. The report is quietly being distributed this week by Verizon Enterprise Solutions, a unit of Verizon Communications Inc., the investigator hired by the retailer, to Target’s banking partners and credit-card issuers and it will document in detail the company’s failings in cybersecurity, according to two people familiar with the situation. While it wouldn’t single out the CEO, it would put a negative mark on a tenure already marred by the stumbles in Canada and online that manifested in poor 2013 financial results.
“The last several months have tested Target in unprecedented ways,” Mr. Steinhafel said in a letter to Target’s board Monday.
Target’s strategy of affordable but stylish fashion and home goods won the hearts and wallets of shoppers over the past three decades. But lately Target is having trouble connecting with consumers when American shopping habits are going through a profound change, as they shop more online and pull back on basics.
The result has been a persistent drop in traffic at Target’s 1,800 U.S. stores. The number of transactions at Target fell 2.7% in 2013, including a 5.5% decline in the key fourth quarter, the worst result since the company started reporting that metric in 2008.
Many of Mr. Steinhafel’s initiatives sputtered. A push into fresh food didn’t attract enough new shoppers making discretionary purchases and a drive to open small stores in urban markets that began four years ago has been slow to gain traction.
None suffered more than his $4.4 billion foray into Canada, which has been dogged by losses and cost overruns.
It began in 2011, when Target bought more than 100 former Zeller’s stores and spent on average $10 million apiece to convert each to its iconic red and white layout. The company opened its doors there in March 2013, its first big international expansion. But with the wrong real estate, prices and merchandise, the losses are piling up—$1.4 billion so far, with up to $600 million more expected this year, according to Tiburon Research Group.
Directors and executives stepped up conversations about whether the challenges might require new leadership, two people familiar with the situation said. The board and Mr. Steinhafel wanted the decision to be mutual. Last week, the board accepted the CEO’s resignation and picked recruiters Korn/Ferry International to find his replacement, the people said.
The board wants the search to include candidates beyond the retail industry, according to people familiar with the situation. A key phrase in recent weeks: Target needs a “transformational” CEO, they said.
Chief Financial Officer John Mulligan, who was the face of Target on Capitol Hill during several hearings with lawmakers over the data breach, will take the reins on an interim basis as the board searches for a replacement both from inside Target’s ranks and from external contenders. Roxanne Austin, a current board member, will take over Mr. Steinhafel’s chairman role, also on an interim basis.
Target’s shares fell 3.5% Monday to $59.87, as the suddenness of the move just two weeks before Target is to report earnings raised concerns that more bad news may be brewing. The company didn’t discuss its financial performance in the announcement.
Mr. Steinhafel’s successor will face broad strategic challenges that go well beyond cleaning up the damage from the data breach. In March this year, only 32% of shoppers in the U.S. visited Target or its website, down from 38% in the same month last year, according to consultancy Kantar Retail.
Part of the problem was the company’s successful move upscale last decade. It drove sales at the time, but has left the company more vulnerable to competition withAmazon.com Inc. AMZN -1.57% About 62% of Target’s shoppers also visit Amazon within four weeks of their Target trip, up from 33% in 2007, according to Kantar Retail
To attract penny-pinching shoppers, Target began focusing more on reducing prices, but had trouble going up against Wal-Mart Stores Inc. WMT +0.55% and dollar stores. It also began to lose touch with the core customers looking for inexpensive but trendy products. The misstep became apparent during the 2012 holidays, when a botched merchandise tie-up with luxury retailer Neiman Marcus resulted in overflowing shelves of sharply discounted Brian Atwood gloves and Rag & Bone sweaters.
With the company’s performance suffering, Mr. Steinhafel’s relationships with other executives grew strained. Target’s top merchandiser, Kathryn Tesija, hasn’t been on speaking terms with Mr. Steinhafel since November—before the data breach hit—and approached the board to talk about the company’s problems, according to people familiar with the matter.
Ms. Tesija was unavailable for comment.
Then came the security breach, which compromised the payment-card data of 40 million customers, hurt holiday sales and kicked off the final chapter of Mr. Steinhafel’s long career at Target.
The three-week breach started the night before Thanksgiving and hit Target at the worst possible time: in the final shopping days before Christmas.
After reporting the initial breach, embarrassing details continued to drip out. Target had to reveal that hackers also had stolen the personal information of 70 million customers. Then it acknowledged it had dismissed alarms raised by its computer security systems.
Directors thought the CEO handled the aftermath well, disclosing findings as they came up and offering free credit support, but the scale of the broader problems and ongoing fallout tipped them in favor of a change, a person familiar with the matter said.
Mr. Steinhafel said he would stay on in an advisory capacity. But, the former CEO was absent Monday from his corner office at Target’s Minneapolis headquarters, according to a person familiar with the situation.
Date: May 8, 2014
Source: Wallstreetjournal