Target paints clear profit picture with growth details

Talk about visibility. Target went way beyond the norm in the retail industry earlier this year when it said that within six or seven years sales would reach $100 billion and earnings per share would double to at least $8. Expressing such a long term outlook is not without considerable risk, chief among them is the rapid pace of change in the retail industry and the fact that the competitive landscape and the factors influencing consumer demand could look very different within six or seven years.

Undeterred, Target executives last week laid out a road map during a meeting in New York for financial analysts that detailed the various strategic initiatives and assumptions that underpin the long-range plan.

Foremost among them are the ongoing conversion of stores to the PFresh format where the most notable elements are the addition of fresh food and an expanded offering of grocery and consumables. Then there is the increased penetration rate of the company REDcard Reward loyalty program.

By year end, the PFresh concept will be in 900 stores. That is a significant number because the addition of fresh food and expansion of dry grocery and consumables has a big impact on customer traffic. Then there is the rewards program that offers shoppers who pay with a Target debit or credit product a 5% discount. The REDcard penetration rate at the end of the second quarter was just shy of 9%, but by this time next year CFO Doug Scovanner indicated that figure could be around 12%, and over time it could be in excess of 20%.

In addition to PFresh and REDcard, another major initiative expected to make a contribution during the holidays and over the longer term is a relaunch of the Target.com e-commerce platform. The relaunch is expected to happen this fall but Target hasn’t provided an exact date.

Another potential longer term growth driver kicking in next year is the opening of the first CityTarget stores. Even though the first units haven’t opened and the optimal size has yet to be determined, the company believes the format has big potential and several hundred sites have been identified for possible expansion.

Another major contributor to growth arrives in 2013 when Target’s first units in Canada are due to open. Target bought 220 leases from Zellers earlier this year and has picked the best locations while selling others to competitors such as Walmart who picked up 39 locations. The first stores to open will be in the Toronto area in March 2013 followed by clusters of stores opening in five different cycles.

“We haven’t totally defined exactly what dates or what months, but we envision five separate dates throughout the balance of the year,” Target chairman, president and CEO Gregg Steinhafel told analysts last week. “We will, in all likelihood, move west secondly, and then lastly, come back to the east. But we’re looking to gain density and scale and distribution, supply chain, marketing, team efficiencies within trade areas in each of those opening cycles.”

In the short run, as in the next several years, Canada will be a drain on profitably as expenses are incurred to transform the stores into new Target locations. This year, the Canadian entry is expected to cost about 20 cents a share, and next year that figure increases to a range of 45 cents to 50 cents before the company turns the corner and begins recording profits by late 2013. By 2017, when the company expects to have 150 units open, sales are expected to total approximately $6 billion and account for earnings per share of 80 cents.