(Source: Fox News)
A female candidate -- Neiman Marcus CEO Karen Katz -- rounds off the top three

Target Corp. (TGT) is on the hunt for a new CEO after the top U.S. retailer suffered an embarrassing data breach last year. The debacle called into question the company's protocols for handling consumer data and damaged the company's otherwise sterling brand.  
Of the three candidates that a recent CNN Money report speculates are leading possibilities, all are external candidates.  Two have close ties to Microsoft Corp. (MSFT) and its CEO hunt, while a third heads an industry ally and in some ways would represent a "safer" pick.
I. The Breach
What provoked Target to potentially rethink its tradition of hiring within and potentially tap top outside talent for its top job?  The answer lies in the data breach that occurred during the 2013 holiday season.
Initial estimates of the breach -- which occurred between Nov. 27 and Dec. 13 -- were that it involved 40 millions customers' credit and debit cards.  Eventually that estimate would swell to an estimated 70 million cardholders.  The breach was eventually traced back to a heating, ventilation, and air-conditioning (HVAC) regional contractor that had remote access to Target's store networks, allowing hackers a backdoor after first breaking into the contractor's weakly defended portal.  

Target kiosk
Target is searching for a CEO even as it fights to win back customers after a massive security breach. [Image Source: Reuters]

Experts say that what Target was doing was not uncommon, but that it was generally bad practice for the retailer to allow common access to customer data from networked workstations dedicated to climate control (the company also had few precautions in place to detect the surge of outgoing customer data).  Experts said that the company missed early warning signs, which could have prevented the problem, or at least limited its damage to fewer customers.
In March 2014 the Chief Information Officer (CIO) of Target Beth Jacobs resigned over the mess (she had assumed the CIO spot in 2008).

Target Beth Jacobs
Former Target CIO Beth Jacobs resigned in Mar. 2014.

On May 5, the attrition reached even higher, with Chairman, President, and CEO Gregg Steinhafel resigning.  Previously the CEO had offered a seemingly heartfelt apology and offered customers both a series of special discount promotions and a year of free credit card monitoring.  But to many, this was too little, too late.

Mr. Steinhafel had been named President in 1999 and CEO in 2008.  He had survived previous controversies -- most notably complaints from the gay rights community who were upset at his donations to evangelical Christian groups who opposed efforts to grant gay couples equal rights to heterosexual married folks.  Unlike Mozilla Foundation CEO Brendan Eich who bowed to similar, but arguably less substantial accusations, Mr. Steinhafel stood firm and carried on.

Gregg Steinhafel
Gregg Steinhafel

But the scandal over the customer credit card loss proved too much.  Target's board already had the smell of blood, and Mr. Steinhafel had a red Target on his back.  In the end he had no choice but to resign.
The CIO spot is already filled by First Data Corp. veteran Robert P. "Bob" DeRodes.  Likewise, the CEO spot is expected to be filled by an attractive outside candidate to restore confidence in the tainted brand.  While it's hunting, Target's board has appointed CFO John Mulligan as interim President and CEO.
II. As Young as Target Brand Seems, Company is Very Old
Whoever inherits the throne at Target will assume both awesome and demanding task of leading America's second largest retailer, behind only Wal-Mart Stores, Inc. (WMT) and -- before the breach, at least -- perhaps America's strongest retail brand.
While Target has thrived in recent years on a young and fresh image, it's actually one of America's oldest surviving retailers.  It was founded in Minneapolis, Minn. in 1902 by George Draper Dayton under the name "Dayton Dry Goods Comp."  In 1911 it was renamed "The Dayton Comp."  Initially in charge of a single large department store, the company quickly emerged as a prominent retailer of the pre-recession Midwest.  The young retailer did not shy from the spotlight with flashy moves such as its commercial deliveries of dry goods from New York City in 1920, flights which while largely a publicity stunt set a legitimate record and paved the road for future commercial air commerce.

Daytpms George Dayton (right) founded Target as Dayton Dry Goods in 1902.

The store passed from the eldest Dayton to his son, with his death in 1938, and then to his grandsons, with his son's death in 1950.  Target thrived by being quick to learn. It became an early adopter of many crucial trends which are today commonplace in retail, including the development of a commercial decor line (1953), suburban strip mall outposts (1956), discount retail (1960), and local distribution centers (1969).
In 1961 The Dayton Comp. announced it was rebranding itself and preparing for a regional launch as a chain discount store.  A paper at the time wrote:

[The retailer will] combine the best of the fashion world with the best of the discount world, a quality store with quality merchandise at discount prices, and a discount supermarket...75 departments in all.  [Its first location includes...] loads of well-lighted parking…for 1,200 cars.

In 1962 Dayton's Director of Publicity Stewart K. Widdess and her staff brainstormed and came up with the classic bull’s-eye logo for the rebranding, a logo that stuck, leading to the store being named "Target".  She would later recall:

As a marksman's goal is to hit the center bulls-eye, the new store would do much the same in terms of retail goods, services, commitment to the community, price, value and overall experience.

In 1966 it tested the waters outside its home in Minnesota, with a store branch in Denver, Colo.  The result was a success and in 1967 the Dayton heirs put forth an initial public offering of stock, to further the growth of the emerging national retail chain.  In 1968 the company's logo was rebranded to a more minimal form, which has remained relatively unchanged ever since.

Target Logos
Target's original logo (left, 1961) and overhauled logo (right, 1968)

In 1969 Detroit, Michigan's historic J.L. Hudson Comp. retail chain merged with Dayton and its subsidiary Target Stores, forming the Dayton-Hudson Corp.  At the time Target was one of the 15 largest non-food retailers in the nation.  Hudsons stores slowly lost momentum, while the Target brand grew strong; by 1975 Target revenue was outpacing revenue from Hudsons.  In 1978 Californian chain Mervyn's was added to the empire, slowly being rebranded as Target stores.
By 1983 the final Dayton family members retired from the company's board of directors, a move that in retrospect appears to have freed the company to explore more aggressive expansive strategies and creative marketing campaigns.  In 1988 it began to expand into the American Pacific Northwest, and in 1989 into the Southeast.
The next decade was a whirlwind of expansion.  By the time the Dayton conglomerate was officially rebranded as Target Corp. in 2000, Target stores were found across most of the country; in 2001 the retail footprint covered 47 states.  Target was again an early adopter of several trends embracing online retail in 1999 (taking note of, Inc. (AMZN) and other emerging "e-tailers"), store credit cards in 1995 (Target initially offered its own credit, but would partner with Visa Inc. (V) in 2001), small produce departments (in 2009), and special city-branded retail fronts (in 2012 in Los Angeles, Chicago and Seattle).

Target at night
Target appeared on fire growth-wise entering 2013. [Image Source: Reuters]

Target's conquest of the American market was completed in 2008 (with stores opening in Alaska) and 2009 (Hawaii) giving Target outposts in every state except Vermont.  2013 was supposed to be a golden year for the retail giant, with its first international expansion -- 124 new Canadian stores opened in a single year across America's northern neighbor.  The move stepped up a campaign that had begun more quietly in Jan. 2011 with the opening of Target’s first Canadian store, obtained via a leasing agreement with Zellers, a subsidiary of the Hudson's Bay Comp. (TSE:HBC) (the company that owns the U.S. Lord & Taylor retail chain).
III. Help Wanted -- The Wal-Mart Veteran Turned Tech-Head
Target has tapped executive search firm Korn/Ferry Int'l (KFY) to lead the headhunt for the next CEO.  And it's willing to think outside the box of its historic strategies.
Dustee Jenkins, a Target spokesman confirmed that despite Target's tradition of hiring insiders like Mr. Steinhafel (who at the end of his reign had 35 years with the company) or Ms. Jacobs who climbed the ranks, it's eyeing potentially outsiders as well.  He comments to CNN Money:
We are looking at all industries. Innovation is incredibly important to Target.
CNN Money quotes various sources as suggesting three names are showing up prominently early in the hunt.  Two are familiar faces from Microsoft's long-winded CEO search.
One is a late-bloomer in that search -- current Microsoft COO Brian Kevin Turner, 47.  Largely unnoticed early in Microsoft's hunt, towards the end of it, he emerged as a potential front-runner.  That turned heads.  

Kevin Turner
Microsoft COO Kevin Turner

Now some are saying Mr. Turner might be a perfect fit, given his retail credentials from earlier in his career.  Mr. Turner served as CIO of Wal-Mart from 2000 to 2002, and then became CEO of Sam's Club from 2002 to 2005, before Microsoft paid dearly to lure him away.  He's held the COO spot at Microsoft for nearly a decade now.
One advantage of Mr. Turner aside from his retail background is that he's shown willingness to switch firms for the right price.  And his age suggests he could enjoy a relatively long run at Target, should he prove a good fit.
One challenge is whether he would accept the offer.  The move would be somewhat of a step down, given Microsoft's market cap is more than eight times Target's, however, generally Target has a stronger brand and is viewed as a more vibrant challenger in its niche.  Call this one in a "highly probable" in the likelihood of Target offering and a "maybe" in the likelihood of Mr. Turner accepting
IV. Help Wanted -- The Auto Icon
Another candidate whose mention will likely elicit eye rolls is Alan E. Mulally, 67.  The eye rolls are not for Mr. Mulally's merits.  As the [outgoing] CEO of Ford Motor Comp. (F), Mr. Mulally would in some ways be uniquely qualified as one of the few proven leaders who successfully handled a troubled asset and steered it back to prominence and prosperity.

Alan Mulally
Another year, another Alan Mulally CEO rumor [Image Source: Guardian UK]

The eye roll part comes due to the fact that for months we heard that Mulally was going to become CEO of Microsoft, replacing close friend Steve Ballmer.  That clearly didn't happen.
But this time around things are a bit different.  Mr. Mulally recently announced he would be wrapping things up at Ford, after becoming CEO in 2006.  In July, Mr. Mulally will retire and Ford's COO Mark Fields will take up the mantle Mr. Mulally current holds.
But is Mr. Mulally really retiring?
This time around the question is much more plausible and intriguing.  Age is certainly a factor, but few have the kind of experience and talent that Mr. Mulally has.  The key question is whether Target would take the risk of asking and whether Mr. Mulally is looking for more work or is truly hanging up his hat.  The answer to all of these questions is a solid "maybe".
V. Help Wanted -- Maven of Haute Fashion
The final candidate is Neiman Marcus Group CEO Karen W. Katz.  The suggestion in some ways seems a natural one, but in others seems unlikely.  What makes it seem less likely is the size of Neiman Marcus Group.  Despite being one of America's largest private retailers, Neiman Marcus only has annual revenues of around $4.6B USD and has roughly 15,000 employees -- making it about 1/22nd the size of Target in terms of workforce, and 1/16th the size of Target in revenue.
On the flip side, other aspects of such an offer make perfect sense. Karen Katz is already in the retail business.  Neiman Marcus under her leadership already enjoyed a close relationship with Target, having a joint 2012 holiday shopping campaign.

Karen Katz
(L-R) Neiman Marcus CMO Wanda Gierhart, fashion designer Diane Von Furstenburg, Neiman Marcus CEO Karen Katz, and Target CMO Jeff Jones at a holiday 2012 event
[Image Source: Getty Images]

At age 56, Ms. Katz's age isn't a major concern.  She became CEO of Neiman Marcus in 2010.  And she loves Target.  No, she really does.  A 2010 interview with Fast Company

Favorite non-Neiman's shopping: Target. "I say it without any embarrassment: I love Target. They have a really beautiful way of blending inexpensive fashion with housewares and laundry detergent and dishwashing detergent."

It'd be hard to say no to Target if they called, not only because she loves them, but also because it would likely represent a big pay raise, for the rising star.  Count this one as a maybe on whether Target will ask, but a "definitely" on what Ms. Katz would say if Target asks.

Karen Katz
Karen Katz, CEO of Neiman Marcus [Image Source: Fast Company]

It's also worth noting that it's almost equally likely that Target's next CEO will be an internal candidate or someone other than these three star executives.  The Microsoft race illustrated that.  Satya Nadella received little attention, not even being viewed as a front-runner until late in the race.  Today he leads Microsoft.  So take all of these lists with a grain of salt.
VI. Brand Backlash
Whoever wins the job inherits a mighty empire of American retail.
The company is generally regarded to have a strong brand image in recent years; however, the last couple years have seen a decline in consumer appreciation for Target. Interbrand examined retail brands and concluded Wal-Mart was the most valuable brand, but Target was a close second.

Target brand
Target has traditionally relied on its strong brand. [Image Source: AP]

Interbrand describes the current state of Target branding, and the upcoming expansion into the Australian market, commenting:

As the most expensive of the discount department store chains, Target positions itself as a mid-tier retailer, offering competitive prices without compromising on brand. It continues its differentiated approach, as a discount fashion store chain, recently announcing designer collaborations with fashion brands such as Collette Dinnigan, Ksubi and Roberto Cavalli.

In addition to opening 12 new stores and upgraded 26 locations last year, it’s expanding digitally as well, increasing its online product offer from 36,000 items to 60,000 by 2014. While the brand’s premium discount fashion positioning gives it an advantage over smaller chains, it’s also facing increasing competition from digital leaders such as The Iconic and ASOS. Target Australia must wow online and on mobile—or lose its share of the retail pie.

Forbes adds that despite the breach Target joined Wal-Mart and Dollar Tree, Inc. (DLTR) as the only three retailers to retain more than 70 percent of customers in surveys following the holiday season.  Vivaldi Partners listed Target as the third most popular social media-age brand in Mar. 2013.
There's also evidence the Target brand may have been tainted by the breach -- and may already have been sliding under Mr. Steinhafel.  New Media Metrics reported Target to be seventh in "emotional attachment."  However, Target was also among the biggest losers in attachment, down 14.3 points last year from 2012.
Target rain
The breach cast a dark cloud over Target. [Image Source: AFP]

And Levick strategic communications firm’s Jason Maloni told the Minneapolis Star Tribune, Target's hometown paper:

The fact remains that Target was behind when this first broke.  Anytime you are not controlling the release of information, you lose the opportunity to cast yourself in the role of the hero rather than the villain.

Criticism was swift on social media, both for Target's confused response and for limited cases in which employees seemed to offer deceptive comments to customers.  Consumer lawsuits pending aren't exactly expected to help the brand image and should provide a financial challenge for Target this year.
VII. Wal-Mart Comparison and Target's Room to Grow
And in spite of all that Target is still the second largest American retailer, and has room for growth if it can recover.
Today the headquarters of Target remains firmly bound to its roots in Minneapolis.  Towering 14- and 32 -story buildings form the current headquarters complex completed in 2002, after $260M USD in spending.  The buildings house up to 6,000 employees.

Target headquarters
Target's headquarters spared few expenses, and is symbolic of the company's aggressive growth. [Image Source: Minneapolis Blogspot]

If these ostentatious towers with a quarter billion dollar price tag hint that Target is a company with money to spend, it's because that's accurate.  One major lure for whoever might become Target's next chief is not only the opportunity to lead such a big firm, but the compensation that comes with it.  Investors and analysts frequently grumbled that Mr. Steinhafel was "overpaid" and it would be somewhat surprising if that trend did not continue with his successor.
Target's fact sheet is one measure of why the CEO post -- challenging as it might be at this time -- is so compelling an opportunity.  Already a giant, the company boasts:
  • 1,789 stores in the United States
  • 127 stores in Canada
  • 37 distribution centers in the United States
  • 3 distribution centers in Canada
  • 361,000 team members worldwide
  • global locations in India and Canada
Share prices could be better, but to be fair part of that was due to concerns back in July over earnings and growth.  From November's peak (~$67 USD/share) to present (~$60 USD/share), Target stock is down more than 10 percent in the last six months.

Target cash
Despite major expansion in 2013, Target saw flat revenue and lower profits. [Image Source: AP]

Financially, Target is strong, but faces eroding profits and tough challenges to further expansion:
  • Revenue (flat)
    • $72.6B USD in fiscal year 2013 [PDF; download] (FY2013)
      • Basically flat versus FY2012 -- with the prior year's 53-week financial year considered
  • Profit (falling)
    • $1.97B USD in net profit in FY2013
      • Down over a billion dollars from the $3.00B USD it made a year prior
    • 29.8 percent gross margin in FY 2013
      • Anemic growth from 0.1 percent in FY2012
  • Debt vs. Assets (strong)
    • A+ to A- long-term debt ratings 
    • $13.8B USD in debt (relatively low despite its aggressive expansion)
    • $44.5B USD in assets
  • Market Cap
    • $37.76B USD
    • Fallen 10%+ in the last 6 months.
Wal-Mart worker
Wal-Mart is Target's substantially bigger rival. [Image Source: AP]

Contrast that with Wal-Mart's financials:
  • $476.3B USD in revenue (up roughly $8B USD from previous year)
  • $16.5B USD in net revenue (down $1B USD from previous year)
  • 10,900+ store units (growth of roughly 500 units from previous year)
  • 24.3% gross margin (no growth from previous year)
  • $255.47B USD market cap
Looking at Wal-Mart we see that Target is in a much more profitable niche, with more of its revenue coming from electronics, clothing, and home goods, versus Wal-Mart which earns over half of its revenue from groceries.  Still Target's retail footprint is dwarfed by Wal-Mart with less than a fifth as many stores.  Likewise revenue is less than a sixth of Wal-Mart's and profit is less than an eight of Wal-Mart's.
In many ways Wal-Mart represents what Target could become it if it overcomes this crisis and continues its path of expansion outside the U.S.  Wal-Mart currently operates in 11 major markets outside the U.S., including developing regions such as Africa and Central America.
VIII. FireEye, Security Strategy are Top Priority for New Chief
Growth is Target's biggest opportunity, but it's hard to grow if your brand is tainted.
A first order of business for the new chief will be to reassure customers of their safety and to make good on the last CEO's promise that customers will not suffer from the breach.  While he was unable to save his own career, Gregg Steinhafel deserves credit for at least offering customers some strong apology promotions and promising them that Target will beat back the attackers in the breach.
In order to do that, it will be crucial for the new chief will be determining what direction to go forward with on the security front.  At the time of the breach Target was testing new third party monitoring technology from FireEye, Inc. (FEYE), a large public traded security firm, to monitor its networks.  This detail emerged in a Mar. 13 report by Bloomberg BusinessWeek.  The technology spotted the intrusion, but failed to delete the malware from machines, because Target had deactivated that feature not trusting FireEye.


It's hard to blame FireEye for Target's decision to deactivate its software.  In fact FireEye has emerged generally triumphant from the mess, scoring new corporate customers.  FireEye recently scooped up Mandiant for $1B USD, strengthening its security portfolio.  Whether or not Target sticks with FireEye, the breach illustrates that its crucial that Target decides who it trusts -- and if that entity is FireEye, to give its tools full freedom to counter threats.
The retailer and/or its corporate security allies will have to act resoundingly to try to knock down, a credit card sales portal that the thieves behind the breach are using to sell consumer credit cards.
The site has enjoyed strong traffic, despite its home in Odessa, Ukraine becoming a conflict zone during the recent Western-backed coup Ukraine's democratically elected government and subsequent Russian "liberation" of parts of the east.  Now under Russian control, Odessa is once more stable, and continues to drive the sales of the stolen Target cards.
Bloomberg reported that Rescator -- and perhaps even the BlackPOS malware used in the breach -- might be the work of 22 year old Ukrainian hacker Andrey Khodyrevskiy.  However, that same source indicated that more savvy Russian and Ukrainian hackers -- identities unknown -- may be the real forces behind the breach, allowing their associate to foolishly disclose his name via source code compiled with his computer name in it.
One thing's for sure -- for any given part of the U.S., Rescator is now flush with thousands of stolen credit card numbers, ready to be bought and used.  Most of these credit cards come from the Target breach, and many have already seen their accounts targeted with financial fraud.  In fact, the amount of data exfiltrated by the hackers -- which flowed from U.S. staging points to Moscow -- totaled gigabytes worth of text files -- files packed with credit card numbers waiting to be mined and abused.

Target breach
Target shoppers' credit cards are now being passed around by Eastern European cybercriminals. [Image Source: Wikimedia Commons] operates cleverly in that it saves the hackers the headache of monetizing the stolen card numbers themselves -- and dealing with the inevitable investigations that ensue.  Average Joes of the fraud world love the site as well, as it gives them access to local cards that are less likely to set off red flags than out-of-state cards, eliminating a common route to catching the criminals in the earlier, less sophisticated days of credit card fraud.

Target will be paying $100M USD and partnering with Visa, fellow retailers, and other banks/credit card firms to roll out new "SmartCard" credit cards, which replace easy-to-copy magnet strip technology with more complicated embedded chips that verify your identity.  The chips don't by the themselves preclude the possibility of hacking, but Target's new plan is a rather obvious and attractive solution -- simply make it too expensive and unattractive to steal consumer credit cards.

Source: CNN Money

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