Despite Breach, Home Depot's Profits Grow$34 Million Net Breach Expenses Projected for Fiscal 2014
Despite a massive data breach that compromised 56 million payment cards and 53 million e-mail addresses, Home Depot reported $1.54 billion in net earnings for its third quarter, a 13.8 percent increase from the same period last year.
The home improvement retailer also reported net sales of $20.5 billion for the quarter, which ended Nov. 2, an increase of 5.4 percent. The retailer revealed the breach, caused by malware, on Sept. 18 (see: Home Depot: 56 Million Cards Breached).
The company has insurance coverage that's offsetting much of the cost of the breach. As a result, it expects net breach expenses for fiscal 2014, which ends Feb. 1, 2015, to total $34 million.
Comparing Home Depot, Target
The earnings news is a sharp contrast from what Target Corp. experienced following its December 2013 breach that exposed 40 million payment cards and personal information about 70 million customers. For three straight quarters, Target has seen its net earnings drop (see: Target Breach: By The Numbers).
Consumer breach fatigue could be one reason why Home Depot didn't see its profits decline, says Rick Holland, a security analyst at Forrester Research. "Target was unfortunate to be the first significant retail breach this year and captured all the headlines," he says.
But another factor could be that Home Depot has fewer direct competitors than Target, says Julie Conroy, an analyst at the consultancy Aite Group.
"In the case of Target, shoppers had plenty of other choices to turn to, but Home Depot is relied upon not just by everyday consumers, but also by contractors who use their supplies to make a living," she says. "While [customers] could take their business to Lowe's, for example, often the geographic distance prevents that from being a truly viable option," which is why Home Depot saw a far lesser degree of customer fall-off than Target, Conroy says.
Still, Home Depot is facing many lawsuits as a result of the breach, the cost of which aren't necessarily going to be reflected in year-to-date expenses and balance sheets, says JD Sherry, vice president at security vendor Trend Micro. "We'll see more expenses due to this breach as we start to see Q4 unfold and even into the first part of next year," he says.
During a conference call with investors and analysts, Carol TomÃ©, Home Depot's CFO, acknowledged the company has a $100 million insurance policy for breach-related expenses.
As a result, while gross breach expenses totaled $43 million for the third quarter, net expenses totaled $28 million, TomÃ© said. For the fourth quarter, the company is projecting gross breach-related expenses to total approximately $27 million, with net expenses of $6 million.
During the call, CEO Craig Menear apologized to customers for the breach and noted: "We'll continue to offer free credit monitoring and ID theft protection to any impacted customers."
The company will also continue to invest in enhanced security measures to protect customers' information, Menear said.