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BUSINESS
Gregg Steinhafel

Target CEO out as data breach fallout goes on

Hadley Malcolm
USA TODAY

With Target still working to pick itself back up after a reputation-damaging security breach that's hurt sales and its sagging stock price, CEO Gregg Steinhafel said Monday that he's resigning after a 35-year career with the discount retailer.

Now, the opportunity to replace him gives what was once one of retailing's most beloved operators a chance to build a fresh image nearly five months after a massive holiday-season data breach demolished customers' trust.

At a Target store in Chicago.

In a statement, Target said that "after extensive discussions, the board and Steinhafel have decided that now is the right time for new leadership. CFO John Mulligan will serve as interim CEO.

Steinhafel and predecessor Robert Ulrich were longtime insiders. But it would be imprudent not to look beyond Target's core internal leadership team for its next CEO, says Jason Hanold, managing partner of executive search firm Hanold Associates.

"Target has such a rich heritage and culture," he says. "As part of their due diligence they have to consider strong internal contenders. But because of the magnitude of the breach and the failures there, they have to look outside."

If the new CEO is an outsider, they'll need to come from an admired brand, Hanold says, such as Starbucks or Amazon. Looking beyond brick-and-mortar retailing would also help Target develop a strategic and competitive vision, says Ken Nisch, chairman of retail branding and design company JGA.

"They need to find somebody who really gets e-commerce," he says. "If I was them, I would probably look at somebody at a Google and not a traditional retailer."

Target hired executive recruitment firm Korn Ferry to assist in finding its next CEO.

Outsiders aren't always the answer, however. J.C. Penney plucked former CEO Ron Johnson from Apple's retail store division to revive the company in 2012. But Johnson's efforts to re-position Penney by ending sales and launching new brands was a failure, and he lasted just 17 months.

Still, whoever eventually settles in as Steinhafel's successor should provide Target an opportunity to reboot its strategies for initiatives that may have been overshadowed by the security breach, Nisch says. That includes growing its fresh grocery business to offer more local and natural options, and building its presence in urban markets with more City Target stores. Fresh leadership could also restore Wall Street's confidence. Target shares, down 3.5% to $59.87 Monday following word of Steinhafel's departure, are off nearly 19% from their 52-week high.

"Now is the time to isolate (the breach) and contain it and get a team focused on the things that defined Target previously, which was fashion, innovation, trends," Nisch says.

Some say Steinhafel, a 35-year Target veteran named CEO in May 2008, should have departed sooner.

"It would have been better to start the year with fresh eyes and a fresh approach," says Brian Sozzi, CEO of Belus Capital Advisors. "I think this reflects the very slow-moving nature that is inherent of Target's culture."

The timing of Steinhafel's departure means he's already contributed to developing strategies for the coming year, but "it was important to part ways before the first-quarter earnings call in a few weeks, before the back-to-school season and before final plans are made for the holiday season," Sozzi says.

Sozzi says Target should seek an outsider with international business experience who could help salvage the retailer's unsuccessful Canadian launch. Target opened 124 Canadian stores last year and plans nine more in 2014.

Target's Canadian expansion has been a "giant failure," says Sozzi, adding that the company opened too many stores at once and has failed to connect with Canadian shoppers who still see more value at Walmart and Costco. "They didn't have the operation of the store properly thought out," he says. "We've seen consistent merchandise out of stock. Prices are too high."

Target's Canadian operation lost $329 million in its fiscal fourth quarter and $941 million for the year ended Feb. 1.

The data breach and trouble in Canada likely both contributed to Steinhafel's departure, says Ken Perkins, an equity analyst with Morningstar.

"The board may just believe that it's time to find somebody else who can take the reins and maybe take them in a different direction," he says. "I think that they really will want somebody who can take an objective look at the Canadian operations and help turn those around."

CFO Mulligan, who is seen as a temporary chief executive, joined Target as a financial analyst in 1996.

Target has shown a willingness to reach outside the company in the wake of the security breach. Last week, the retailer hired Bob DeRodes as Chief Information Officer. He replaces Beth Jacob, who resigned in March. DeRodes worked for payments processor First Data, formerly served as CIO at Home Depot and is a director at NCR Corp.

Computer hackers stole credit and debit card information from 40 million Target customers during the holiday shopping season. In January, Target revealed that personal information, including e-mail addresses and phone numbers, may have been stolen from up to an additional 70 million customers.

Since then, Target hastened its timeline for switching to more secure chip-based credit and debit cards and the payment terminals that accept them. As part of its $100 million effort, Target said all of its store-branded cards would be reissued as MasterCard chip-and-pin cards in 2015.

As it continues to regain customers' confidence, Target's new CEO will need to help the retailer write a new narrative, says Richard Metheny, who heads the leadership solutions business for recruitment firm Witt/Kieffer.

"They have to step in with a story," he says of Target's next leader. "They need to be able to step in and say, 'This is where Target is today. And let me tell you where it's going to go.' It doesn't have to be specific. It just has to be some sense of hope that the market buys into."

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