Target is grappling with a data security nightmare that threatens to drive off holiday shoppers during the company's busiest time of year and a forensics firm has joined the investigation.
The nation's second largest discounter said Thursday that data connected to about 40 million credit and debit card accounts was stolen as part of a breach that began over the Thanksgiving weekend.
The data theft marks the second largest credit card breach in the U.S. after retailer TJX Cos. announced in 2007 that at least 45.7 million credit and debit card users were exposed to credit card fraud.
Target's acknowledgement came a day after news reports surfaced that the discounter was investigating a breach.
The chain said customers who made purchases by swiping their cards at terminals in its U.S. stores between Nov. 27 and Dec. 15 may have had their accounts exposed. The stolen data includes customer names, credit and debit card numbers, card expiration dates and the three-digit security codes located on the backs of cards.
The data breach did not affect online purchases, the company said.
The stolen information included Target store brand cards and major card brands such as Visa and MasterCard.
The Minneapolis company, which has 1,797 stores in the U.S. and 124 in Canada, said it immediately told authorities and financial institutions once it became aware of the breach on Dec. 15. The company is teaming with a third-party forensics firm to investigate and prevent future breaches.
The breach is the latest in a series of technology crises for Target. The company faced tough criticism in late 2011 after it drummed up hype around its offerings from Italian designer Missoni only to see its website crash. The site was down most of the day the designer's collection launched. The company angered customers further with numerous online delays for products and even order cancellations.
But the credit card breach poses an even more serious problem for Target and threatens to scare away shoppers who worry about the safety of their personal data.
"A data breach is of itself a huge reputational issue," said Jeremy Robinson-Leon, a principal at Group Gordon, a corporate and crisis public relations firm. He noted that Target needs to send the message that it's rectifying the problem and working with customers to answer questions. He believes Target should have acknowledged the problem on Wednesday rather than waiting until early Thursday.
"This is close to the worst time to have it happen," Robinson-Leon said. "If I am a Target customer, I think I would be much more likely to go to a competitor over the next few days, rather than risk the potential to have my information be compromised."
Target advised customers on Thursday to check their statements carefully. Those who see suspicious charges on the cards should report it to their credit card companies and call Target at 866-852-8680. Cases of identity theft can also be reported to law enforcement or the Federal Trade Commission.
"Target's first priority is preserving the trust of our guests and we have moved swiftly to address this issue, so guests can shop with confidence. We regret any inconvenience this may cause," Chairman, President and CEO Gregg Steinhafel said in a statement Thursday.
Many displeased Target customers left angry comments on the company's Facebook page. Some threatened to stop shopping at the store. Many customers complained they couldn't get through to the call center and couldn't get on Target's branded credit card website. Target apologized on its Facebook page and said it is "working hard" to resolve the issue and is adding more workers to field the calls and help solve website issues.
Christopher Browning, 23 of Chesterfield, Va., said was the victim of credit card fraud earlier this week and he believes it was tied to a purchase he made at Target with his Visa card on Black Friday. However, he called Visa Thursday and the card issuer couldn't confirm. He says he hasn't been able to get through Target's call center.
On Monday, Browning received a call from his bank's anti-fraud unit saying that there were two attempts to use his credit card in California - one at a casino in Tracey, Calif. for $8,000 and the other at a casino in Pacheco, for $3,000. Both occurred on Sunday and both were denied. He canceled his credit card and plans to use cash. Although Browning has no proof, he says he believes the fraud was tied to his Black Friday purchase at Target.
"I won't shop at Target again until the people behind this theft are caught or the reasons for the breach are identified and fixed," said Browning.
Brianna Byrnes, 22, of Kansas City, Mo., a student at the University of Missouri-Kansas City and a call center worker, said she made a Target purchase during the affected period.
She said the situation made her "a little bit" nervous but was still planning to shop for toys at the retailer.
"I've never had anyone steal my identity. I guess it's taking a risk."
In Wednesday morning's trading, Target's stock dipped $1.15, or 1.8 percent, to $62.40.
The incident is particularly troublesome for Target because it has used its branded credit and debit cards as a marketing tool to lure shoppers with a 5 percent discount.
The company said during its earnings call in November that as of October some 20 percent of store customers have the Target branded cards. In fact, households that activate a Target-branded card have increased their spending at the store by about 50 percent on average, the company said.
"This is how Target is getting more customers in the stores," said Brian Sozzi, CEO and Chief Equities Strategist. "It's telling people to use the card. It's been a big win. If they lose that trust, that person goes to Wal-Mart."
Even if Target shoppers haven't noticed suspicious activity on their credit card accounts, a Target spokeswoman said, "we encourage everyone to be vigilant."
Target hasn't disclosed exactly how the data breach occurred, but said it has fixed the problem and credit card holders can continue shopping at its stores.
"The fact this breach can happen with all of their security in place is really alarming," said Avivah Litan, a security analyst with Gartner Research.
Litan noted that companies like Target spend millions of dollars each year on credit card security measures. Given the company's heavy security, Litan said she believes the theft may have been an inside job.
Target is just the latest retailer to be hit with a data breach. TJX Cos., which runs stores such as T.J. Maxx and Marshall's, had a breach that began in July 2005 that exposed at least 45.7 million credit and debit cards to possible fraud. The breach wasn't detected until December 2006. In June 2009 TJX agreed to pay $9.75 million in a settlement with multiple states related to the massive data theft but stressed at the time that it firmly believed it did not violate any consumer protection or data security laws.
At TJX, for at least 17 months, one or more intruders had free rein inside TJX's computers. Without anyone noticing, one or more intruders installed code on the discount retailer's systems to methodically unearth, collect and transmit account data from the millions of credit card and debit cards.
An even larger hack hit Sony in 2011. It had to rebuild trust among PlayStation Network gamers after hackers compromised personal information including credit card data on more than 100 million user accounts.
Litan said she doubts the breach will have much of an effect on Target's sales, noting that TJX launched sales promotions immediately following the news of its breach. The promotions increased sales.
"People care more about discounts than security," Litan said.