Minneapolis-based Target Corp. rarely goes out on a limb. But after turning in a solid third-quarter performance Wednesday, CEO Gregg Steinhafel predicted that the holiday season will lift the company to its best quarterly same-store sales "in the last three years."
It was as much a testament to bumpy roads in the rearview mirror as a foretelling of huge gains.
Target forecasts a 2 to 4 percent rise in same-store sales in the fourth quarter and would need to beat the 2.8 percent gain posted in the first quarter of this year to prove Steinhafel prescient.
With the National Retail Federation predicting holiday sales to rise just 2.3 percent, Target's optimism is a good sign in the skittish retail industry.
Steinhafel's confidence comes in no small part from Target's early success from its new REDcard program, launched four weeks ago, where users of its Target credit or debit card get 5 percent off at the cash register.
The company believes the program will boost sales 1 percentage point in the fourth quarter, and up to 2 percent in 2011.
Steinhafel describes the REDcard program as a "game-changing strategy," on par with the retailer's aggressive rollout of fresh food areas in its general merchandise stores.
When testing the program in Kansas City, the retailer got the biggest sales lift among the 10 percent of Target shoppers who ring up nearly half of its sales. The trend seems to be holding up nationwide, Chief Financial Officer Doug Scovanner told analysts in a morning conference call.
Sales the first two weeks of November already are off to a strong start, with gains in the mid-single digits. The company maintained First Call estimates of $1.38 for fourth quarter earnings.
David Heupel, a senior equity portfolio manager with Thrivent Financial in Minneapolis, said no other retailer in the country has anything like the blanket discount for certain customers, and Target started it at a time when consumers are gearing up to spend for the holidays. Even if they've missed television and newspaper ads, it's hard for shoppers to ignore the giant red dots promoting the program on store floors.
"When you look at the quarter, there's not a whole lot that was exciting," Heupel said. "So they're saying, 'Hey, we're going to throw a big fourth quarter at you.' And, let's face it, it's the money quarter. It's what matters when it comes to these stocks."
Target shares rallied after the rosy outlook, which lifted all retailers. By day's end, Target stock was up 3.9 percent to $55.62.
For the third quarter ending Oct. 30, Target said earnings rose 22.6 percent to $535 million, or 74 cents a share, as profits doubled in its credit card business and more stores added fresh food. Excluding a tax gain, profit was 68 cents a share, in line with Wall Street's expectations.
Revenue grew 2.2 percent to $15.6 billion at the nation's second-largest discount chain. Sales remain most robust in household staples of food, health care and beauty, signaling that consumers still are managing budgets frugally. Traffic at stores grew a little more than 2 percent in the quarter, but shoppers spent 0.5 percent less. Same-store sales were up 1.6 percent in the third quarter.
Target shoppers continue to carry lists, but they're no longer focused solely on the lowest prices, said Kathee Tesija, executive vice president of merchandising. Shoppers are becoming more willing to save up and spend on things they want, she said. That is showing up in sales of clothes, beauty products and higher-end cookware.
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