Wall Street responded warmly to Target Corp.'s pronouncement Tuesday that the popularity of its credit card reward program and its expansion into Canada should help the company double its net income in the future.
Target stock rose $1.18 to $50.44.
Speaking at a financial conference, Chief Financial Officer Douglas Scovanner told analysts that the Minneapolis-based retailer hopes to top $100 billion in sales in the years ahead. Sales last year totaled $67 billion, up 3.7 percent.
Analysts were impressed.
"They're a very good merchandiser that is able to coexist with a very tough competitor in Wal-Mart," said Matt Arnold of Edward Jones & Co.
Target announced in January that it plans to open 100 to 150 stores in Canada in the next five years. The company also plans to roll out six smaller CityTarget stores in U.S. cities including Chicago, Seattle and San Francisco. Each will have 80,000 to 100,000 square feet of retail space, compared with the typical 134,000 square feet, officials said.
The company's reward cards, called Redcards, already are a success, offering customers automatic 5 percent discounts on store purchases. The cards include Target's credit card and Visa and debit cards.
"It's a pure discount at the cash register on already good prices," said Arnold. "It's a strong loyalty driver."
Card use sharply higher
The new program differs from Target's previous rewards program, which offered an initial 10 percent discount when customers enrolled and met certain spending thresholds. The new card has generated "a huge number of new accounts and a much higher level of guest engagement," Scovanner said.
Customer's tendency to repeatedly use the new reward card "is sharply higher," than under the old plan, he said. The new approach ended what he called the "one and done syndrome" of discount cards. "This is very clearly a program that has multiyear legs," he said.
Scovanner added that the new card already has "three and a half times the annualized issuance" rate of the previous debit and credit cards combined and created a 7.3 point penetration rate. "That is 180 basis points above last year," he said.
Target's long-term growth goals, besides the $100 billion sales threshold, include doubling its earnings to $8 per share in the next six to seven years.
Prospects in Canada
Target's entrance into Canada, where it had no stores, will initially "create a pretty meaningful dilution against these growth rates in the first couple of years," Scovanner said. But the move from having lots of "expenses and no revenue" to having billions in Canadian revenue will help the company "turn the corner pretty sharply from an earnings per share standpoint."
Marketing Prof. Akshay Rao of the Carlson School of Management applauded Target's approach to Canada because its market is culturally similar to the U.S. market. Some U.S. retailers have struggled in foreign markets, including Best Buy, which recently retreated from its expansion in China.
"It's a more measured approach," Rao said. "The Target concept is familiar to that culture [of Canada] and the odds of success are considerably higher than in India or China."
Scovanner added that Target should "quite reliably" have more than 200 stores in Canada within the next five or 10 years. Within seven years Canada will be contributing $6 billion in revenue at a 10 percent plus EBITA margin rate, he said.
Analyst Burt Flickinger, who is managing director of Strategic Resource Group, said Target is "doing a superb job" with its expansion and its emphasis on a creating discount supermarkets within its stores.
"That's really hitting Wal-Mart hard," he said.