Target addresses analysts' credit concerns: new Visa card business plagued by Sears' troubles

DSN Retailing Today, Nov 11, 2002 by Laura Heller

MINNEAPOLIS -- Target hosted its annual meeting with analysts last month, where it treated attendees to a tour of its downtown Minneapolis bi-level store, outlined future growth and merchandising initiatives, and tried to assuage fears surrounding the company's credit business.

Chairman and ceo Bob Ulrich reiterated the company's focus on its guests and its ongoing success in establishing successful merchandising partnerships. But operational and technological efficiencies will remain a focus going into next year, as the company continues to reduce costs, improve ordering efficiency, build out its distribution system, focus on supply chain management and implement new Web-based technology that stands to improve sourcing and lower costs.

Target tried, but couldn't quite shake questions about its credit business, largely due to events that leveled Sears earlier this month. Vice chairman Jerry Storch outlined Target's credit business, focusing largely on the rollout of its new Target Visa card that utilizes smart card technology. Since its national rollout last fall, nearly eight million cards have been issued, though this includes multiple cards issued on a single account. Nearly two-thirds of these cardholders were converted from among what Storch described as "Target's highest-quality guest cardholders."

In addition, "Guests who use Target Visa in our stores routinely spend 50% to 60% more than other Target guests," he said. "Our rewards program is generating a significantly higher average ticket than the average visit and the greater frequency related to the redemption of the 10% off certificates than a typical visit."

Target next year also will begin testing electronic coupons and using smart chip readers at point of sale. It will partner with several vendors, including P&G, Unilever, Pepsi and Nestle, to make tailored promotional offers to consumers based on purchasing behavior.

Despite these initiatives and management's assurance the credit division does not pose a threat at all similar to Sears' problems, analysts were less than enthusiastic.

"Although we anticipate no problems, clouds looming over the company's credit division, created by the difficulties at Sears, are unlikely to be lifted in the near-term," wrote Merrill Lynch's Dan Barry in a research note. "Target remains disciplined in its approach for new cards," said JP Morgan's Shari Eberts. "Even so, these new credit relationships are probably a bit higher risk given the lack of credit history. While the jury is still out on portfolio quality, our major beef with credit continues to be its lower return on capital."

Eberts also wrote, "operating performance at SuperTarget remains challenging, with results quite variable by store location." "Target continues to state its return on capital for SuperTarget is similar to that of a traditional Target store of the same age, with a lower margin offset by higher inventory turns. We remain skeptical about the format's long-term growth potential, given its mixed success on the food side."

SuperTarget is expected to generate 25% to 40% of Target's new store growth next year, said president Gregg Steinhafel. "SuperTarget is generating sales that are 50% to 100% higher than a comparable Target discount store, with 80% of the total sales being generated from products we carry in our traditional stores." SuperTarget is producing strong top-line growth driven by substantially increased guest traffic and a modestly higher average ticket.

On the merchandising front, Target next fall will introduce OshKosh in children's playwear and will continue to build on its recently relaunched Merona brand of casual businesswear in 2003. Maternitywear from Liz Lange and housewares from Cynthia Rowley also will hit stores.

In step with the difficult economic environment, "Target has and will continue to increase its emphasis on the "Pay Less" part of its marketing slogan," said Steinhafel. "Over the past 12 months, we have intensified our efforts to convey value to our guests," he said. "We have reduced opening price points on thousands of items, while maintaining product quality that is equal to or better than our competitors. We have increased the visibility of our value message in everything from in-store marketing to broadcast advertising," he said. "In fact, three times this year--in January, July and earlier this month--we have run a campaign with the tag line, 'Prices so low you don't have to hold back."'

In all, analysts found little to be surprised by after the meeting. Management continued to reaffirm its commitment to both Mervyn's and Marshall Field's, where it continues to fine-tune its "good, better, best" assortment, build on seasonal events to drive traffic, heighten the importance of secondary holidays, and develop more exclusive lines through private label and design partnerships, said Ulrich.

"Though we are fully satisfied with the level and general stability of Mervyn's current profitability, we are keenly focused on efforts that will increase Mervyn's sales," said Ulrich. To that end, Target will be adding new brands, such as Columbia, Norton McNaughton, Stiffel and Oshkosh. The women's apparel department will be expanded by 15% to 20% primarily in juniors and special sizes, and the cross-merchandising of soft home and decorative home categories will receive greater emphasis.