Target shows off Visa card and pines for all the credit - Brief Article

DSN Retailing Today, Nov 19, 2001 by Laura Heller

MINNEAPOLIS -- Target Corp. hosted its annual analyst meeting late last month, and in spite of current events and economic issues, management was clearly focused on the future--one that includes increased operational efficiencies, more high profile partnerships, a still-evolving SuperTarget strategy and expected big gains from the new Target Visa Card.

In this economy, no big news is good news, and Target gladly obliged analysts in this area. Yet in addition to addressing ongoing operational initiatives and progress with the SuperTarget expansion, chairman and ceo Bob Ulrich and his team singled out the issue of Target's growing credit business.

In June, the company announced the introduction of its new smart Visa card after successfully pilot testing it in several markets. But Wall Street had some concerns that seemed to be soothed following the meeting.

Target has begun to offer the card to new customers, but told analysts the bulk of its efforts through next year will be to convert its best customers from the existing Target card to the new Visa. Management expects 1-in-4 applicants to be accepted to the program.

William Blair analyst Mark Miller is bullish on the Visa effort. "One of the most important new developments for the company going forward is the rollout of Target Visa," he said. "Target has the opportunity to expand its loan portfolio by $1 billion to $2 billion per year over the next five years." He estimates that will raise profits from this business from $4 billion to $4.5 billion in the current fiscal year to $12 billion five years from now.

That is exactly what concerned some analysts prior to the meeting. Focusing on non-retail growth, such as financial services, is viewed as a sign of mature business, and Wall Street likes growth stories. Sears, for example, is expected to glean approximately 71% of total earnings per share this year, or 74% of total operating profits, from its credit business. The meeting put many of those concerns to rest.

"Credit boosts bottom-line performance, but Target is dearly a growth retailer, not an ailing 'old generation retailer,"' wrote Banc of America Securities analyst Shelly Hale following the meeting. "Unlike other 'challenged retailers,' Target with only 1,000 stores and 13% share of the mass merchant industry is still a 'growth story' with 10% to 12% annual square footage growth."

While much of this growth was expected to come from supercenters, management indicated a slight shift in its SuperTarget expansion strategy, said Hale. With 62 such units in operation, some had speculated the total number of stores could double next year. Instead, management indicated just 30 new SuperTarget's would bow next year, but declined to release a total number. Hale calculated this store projection based on a statement that new units would contribute 5 million square feet to the Super-Target division next year, down from her estimated 35 new stores. Still, the company will add a projected 110 stores next year, a 12% square footage increase over 2001.

The company has continued to tinker with the Super-Target format, adding more opening-price-point items, such as the new Market Pantry private-label line. In fact, Target has become more competitive on pricing across categories and formats given that approximately 60% of its supercenters now overlap with Wal-Mart.

Target is continuing with supply-chain initiatives to raise in-stock levels, reduce handling costs and lower inventory. However, the company has increased on-site inventory for some advertised and high-volume items to reduce out of stocks.

Management also indicated it would continue to roll out new merchandising initiatives next year, including programs from Woolrich, Ecco, an expansion of Waverly and a new children's StrideRide line, said Emme Kozloff of Sanford Bernstein. Brand migration to the discount chain is expected not only to continue, but increase. Given the current economic environment and declining sales at department stores, name brands are increasingly approaching Target about partnerships, marking a shift from the days when Target was the pursuer.

This trend is only expected to build as department stores continue to lose market share to the discount channel, numbers that are evident in the financial results for Target's Marshall Fields division, where comparable stores sales dropped 10.1% in October and are down 5.7% year to date.