Target Earnings Preview: What We’re Watching

We expect Target (NYSE:TGT) to report moderate growth as it releases its Q1 fiscal 2013 results on May 22. While the retailer’s rewards program, exclusive partnerships and strong online channel will help, the prolonged cold and cautious consumer spending in the U.S. can have a mitigating impact. In March 2013, Target opened its first stores in Canada and we’ll look out for any color that the company provides on its initial performance. During the quarter, the retailer closed its credit card deal with Toronto Dominion bank and will not be reporting credit card as a separate segment going forward.

See our complete analysis for Target

REDcard & Pharmacy Rewards Program Will Help

Since its launch approximately two years ago, the 5% REDcard loyalty program has played a notable role in driving Target’s store traffic. The loyalty program allows customers to save money when they shop at Target stores using its brand credit or debit card. Customers are also offered free shipping for online orders and 30 extra days of return. ((Target’s REDcard)) The company has stated that its REDcard customers tend to visit twice as often as its regular customers and spend about 50% more. REDcard penetration increased by about 3% in fiscal 2012, and has nearly tripled in the last two years. ^[1] It appears that value-conscious customers are switching to REDcard shopping due to attractive bargains, and this should help Target’s results for this quarter.

Target’s relatively new loyalty program, pharmacy rewards, has also proved successful. In this program, customers get 5% off on shopping after filling five eligible prescriptions. ^[2] The pharmacy guests shop at Target stores about three times more often and spent 50% more than the non-pharmacy guests. ^[1] As the program gains popularity among Target’s customers, it will result in higher sales and this might reflect in Q1 results as well.

Growth In Online Sales Should Complement Comparable Store Sales Growth

Online shopping is gaining popularity in the U.S. due to increasing Internet penetration as well as the proliferation of smartphones and tablets. Forrester forecasts that online sales in the U.S. will grow 13% to $262 billion in 2013 and reach $370 billion by 2017. ^[3] According to Target’s management, its mobile and online sales grew faster than the industry average, which is an encouraging sign.

To achieve this, Target has been investing in mobile and website technologies as well as integrating its stores and online channel. As part of this initiative, the retailer has been installing free Wi-Fi in its stores to make it easy for customers to access its e-commerce channel. ^[4] Also, Target is looking to use social media to direct online traffic to its stores. Recently, it launched a new website called “Cartwheel” in partnership with Facebook which allows users to log in and gain access to various discounts. ^[5] These discounts are in the form of barcodes that can be redeemed at any Target store. As a member of Merchant Customer Exchange (MCX), Target is involved in developing better mobile payment solutions which should help its online sales. ^[6]

Exclusive Partnerships Can Help In Attracting Customers

Target’s continued partnership with popular designer Prabal Gurung received good customer response last quarter despite the weak holiday season. The designer collection offers handbags, ready-to-wear, jewelry and shoes at affordable prices. Recently, Target partnered with actor Justin Timberlake to offer exclusive version of his release “The 20/20 Experience“. ^[7] Target also collaborated with famous designer Kate Young to create a limited edition collection of women’s apparel, accessories and shoes for the spring season. Such partnerships have helped the retailer drive store traffic in the past and we expect them to continue to contribute to Target’s growth in this quarter as well.

However, Prolonged Cold & Cautious Consumer Spending Will Weigh On The Results

The winter this year was unusually long, which impacted sales of a number of retailers due to lower demand for seasonal products. ^[8] In a recent press release, Target stated it has seen weaker-than-expected sales in seasonal and weather-sensitive categories. ^[9] Earlier this year, the payroll taxes in the U.S. increased by 2%, which hurt the lower and middle income segment consumers. Additionally, the tax refunds were delayed due to year-end complications related to the fiscal cliff. Since the IRS delayed the filing process by almost 15 days, refund checks were behind schedule. As a result, the total tax refund amount for the first two weeks of February decreased by 28% compared to the same period a year ago. ^[10] These factors weighed on consumer spending which negatively impacted Wal-Mart’s sales. ^[11] We expect a similar impact on Target’s results as well.

Our price estimate for Target stands at $72, implying a discount of about 5% with the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Target’s Q4 fiscal 2012 earnings transcript, Feb 27 2013 [↩] [↩]
2. Pharmacy Rewards [↩]
3. U.S. Online Retail Sales To Reach $370 Billion By 2017, Forrester, March 13 2013 [↩]
4. Target’s Q4 fiscal 2012 earnings transcript [↩]
5. Target tests if Facebook driven deals bring shoppers into stores, Reuters, May 8 2013 [↩]
6. Merchant Customer Exchange [↩]
7. Justin Timberlake, The 20/20 Experience [↩]
8. Prolonged Winter Puts Retail Sales In Deep Freeze, CNBC, Mar 31 2013 [↩]
9. Target Provides Updated First Quarter and Full Year-2013 Guidance Following Settlement Of Debt Tender Offers, Target, Apr 16 2013 [↩]
10. There’s Is An Explanition For The Wal-Mart News That Isn’t Bad For The Economy At All, Business Insider, Feb 19 2013 [↩]
11. Wal-Mart’s Q4 fiscal 2013 earnings transcript, Feb 25 2013 [↩]