Credit card use powers Target's 15% profit gain

  • Article by: DEE DEPASS , Star Tribune
  • Updated: November 15, 2012 - 9:09 PM

Analysts say the use of Target's Redcard, which encourages repeat business, has even more room to grow.

Target Corp.'s Redcard isn't merely rewarding its customers. The credit card is powering profits at the retailer, as more shoppers whip it out to buy food, toiletries and items from Target's exclusive collections.

The Minneapolis-based company said Thursday that third-quarter earnings jumped 14.8 percent to $637 million, or 96 cents a share. The results included a 15 cents-a-share gain from the pending sale of Target's credit card portfolio to TD Bank next year. Under the deal, Target and TD Bank will split the profits from the business, with Target earning a significant chunk of the money.

Target CEO Gregg Steinhafel said Thursday that the Redcard, which gives shoppers 5 percent off purchases, "motivates our current guests to shop at Target much more often."

During the quarter, Redcard spending rose to 14 percent of sales from 9.5 percent a year ago and 5.5 percent two years ago. In Kansas City, credit card purchases jumped to 20 percent of sales during the quarter.

"It looks like the year-over-year penetration is actually accelerating a little bit. And with Kansas City at 20 percent, it certainly suggests there's a lot of upside potential. I've noticed there is certainly a bigger push behind marketing the program," said Colin McGranahan, equity research analyst at Sanford C. Bernstein & Co.

Steinhafel said Target expects to add 3 million credit and debit accounts this year.

Total revenue for the third quarter inched up 3.2 percent to $16.9 billion because of expanded P-Fresh grocery offerings, strong school supply sales, Target's new Nate Berkus home collection, new City Target stores and the continued push of the Redcard across 1,782 locations.

"We're pleased with Target's third-quarter financial performance, which reflects superb execution across each of our business segments," said Steinhafel during a conference call with analysts Thursday.

By comparison, Arkansas-based Wal-Mart, which also announced third-quarter earnings Thursday, saw sales rise 2.7 percent to $113.9 billion. Profit rose 5.8 percent to $3.6 billion.

Steinhafel said Target is positioned to deliver a solid fourth quarter. He noted a four-pronged initiative that includes its new Target-Neiman Marcus holiday collection, its Redcard rewards program, more mobile shopping tools and a new online and holiday price-matching policy.

"We feel very good about our ability to deliver inspiring merchandise, most-wanted gifts and unbeatable value, while also generating expected profitability," Steinhafel told analysts.

Shareholders applauded Target's performance Thursday, sending the stock up $1.06 to close at $62.44.

The company plans to open its retail stores at 9 p.m. on Thanksgiving. Some analysts speculated that the retailer may hear complaints from customers who are offended that the Black Friday shopping craze has crept into their holiday family time.

But Target is only the latest to follow the trend as Wal-Mart, Sears and other retailers throw open their doors as early as 8 p.m. next Thursday.

Target said it now expects fourth-quarter earnings of $1.45 to $1.55 a share, which includes the impact from holiday sales and expenses associated with new Canadian stores that will begin opening in April 2013. Officials said Target's entrance into Canada affected third-quarter earnings by about 13 cents a share.

Dee DePass • 612-673-7725

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