Unlocking Value? Starboard Invests In Staples And Office Depot (Part 19 of 19)
SPLS’s data breach
Last week, Staples (SPLS) reported a data breach. Credit card information was stolen for ~1.16 million customers.
SPLS’s data security experts reported that malware had been used at point of sale terminals at 115 of its US retail stores in September. After it detected the breach, SPLS took action to eradicate the malware and enhance its security. It used external data security experts for the investigation. This will likely impact retail (XRT)(XLY) and e-commerce sales for SPLS, at least in the near term.
Target’s data breach
This represents a risk for SPLS’s competitors as well—like Home Depot (HD) and Target (TGT). On December 19, 2013, TGT reported a similar situation. The breach impacted its financial performance. TGT also changed its CEO.
However, TGT’s breach was larger. It impacted over 40 million credit cards. It compromised the personal information for ~110 million accounts. The cost of the breach was estimated at ~$148 million. Part of the cost was recovered by TGT’s insurance coverage of $38 million. Last year, its fourth quarter profit declined by 46%. TGT’s traffic declined. Sales decreased by 5.3%. This was mainly a result of the breach.
Brand value
It isn’t easy to measure the loss of goodwill and brand value. Customers will be wary of shopping at stores—like TGT and SPLS—where there are security lapses, at least in the near term. The fourth quarter is usually when retailers have the most sales. The lapse will likely impact the company’s results. Store traffic may be subdued in the months after the breach.
Home Depot reports a breach
In September 2014, Home Depot (HD) also reported a data breach. It exposed millions of credit cards and personal account information to hackers. Company guidance estimated the gross amount of expenses resulting from the breach at ~$62 million. ~$27 million will likely be reimbursed by HD’s insurance coverage.
However, unlike TGT, customers weren’t impacted by the breach. They continued to shop at HD. The company’s revenues and earnings guidance for the third quarter and fiscal year 2014 remained the same.
Legal liability
This month, a US District judge in Minnesota ruled that customers can sue TGT for the breach. This represents an additional cost for the company. HD is also facing dozens of lawsuits due to the breach. A similar judgment may come for SPLS in the future. The impact of liability from lawsuits may not be known immediately. However, liability will impact all three retailers.