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Megan Hickey/ MEDILL

State Street's new Target location is attracting younger, more affluent shoppers according to company executives.

Chicago shoppers help Target hit the mark

by Megan Hickey
Nov 15, 2012


Megan Hickey/ MEDILL

Target's earnings rose 15 percent this quarter thanks, in part, to increased profits in CityTarget locations like this one on State Street.


Megan Hickey/ MEDILL

Target stores are getting ready for the holiday season and even higher profits.

Target Corp. can thank Chicagoans, in part, for a nearly 15 percent increase in its third-quarter earnings. The chain’s Loop location, which opened in July, was one of four new CityTarget sites that were particularly profitable for the “cheap chic” retailer. The company’s bottom line also benefitted from an aggressive credit card rewards program.

The initial success of Target’s State Street location in the former Carson Pirie Scott building is the result of simple demographics, according to Executive Vice President Kathy Tesija. “The typical guest in the urban format is younger and more affluent that we see across the chain,” Tesija said. Chicago and the other CityTarget locations in Seattle, San Francisco and Los Angeles produced better than expected profit margins as a result.

Retail analyst Sean Naughton of Piper Jaffray & Co. explained that CityTargets like Chicago’s are also capitalizing on Target’s ability to under price mom-and-pop stores. “They have the ability to offer lower prices than a smaller local competitor and that should help to drive traffic,” Naughton said.

The Minneapolis-based company earned $637 million, or 96 cents per diluted share, up from $555 million, or 82 cents per diluted share, in the year-ago period. The results were exactly in line with the estimates of analysts surveyed by Bloomberg.

Overall revenue increased 3.2 percent to $16.9 billion from $16.4 billion in the year-ago period.

Target’s Redcard rewards program was a big factor in the third-quarter increases, company executives said. The credit and debit program has helped to spur sales with an incentive of a 5 percent discount on every purchase.

The number of credit card transactions on Target’s proprietary credit card increased 14 percent in the third quarter. CEO Gregg Steinhafel said the company is currently on track to provide 3 million credit and debit card accounts by the end of the year. The Target debit card is linked directly to customers’ checking accounts and even allows shoppers to receive cash back on top of their purchase.

Incentives for cardholders also include a longer return policy. “It’s a powerful, immediate and simple program,” Steinhafel said. “A lot of our guests spend thousands of dollars and that 5 percent is a meaningful savings for them.”

One downside of the program is that it has reduced Target’s profit margin. The company’s gross margin was 30.3 percent in the third quarter, down from 30.5 percent in the year-ago period. Analyst Naughton said this decrease is actually less dramatic than he expected. A large proportion of customers use their Target cards to purchase food, which has a lower gross margin in general.

But increased sales have more than made up the difference. In the first nine-months, Target’s net earnings increased 4.6 percent to $2.03 billion, or $3.06 per diluted share, up from $1.95 billion, or $2.48 per diluted share. Revenue increased 4.1 percent to $50.6 billion from $48.6 billion.

As Black Friday and the holiday shopping season approach, Target executives issued a positive outlook for the fourth quarter. According to Naughton, Target’s sales this holiday period are expected to rise in accordance with expected industry increases of 2 to 4 percent.

The biggest attraction for Target shoppers on the prowl this December is likely to be Target’s Neiman Marcus Holiday Collection. Target is teaming up with 24 top designers to roll out a line of 50 limited-time-only apparel and gift items for the holiday season. Among the highly sought after designers participating in the event are Oscar de la Renta, Marc Jacobs, Tory Burch and Diane von Furstenberg. The collection goes on sale Dec. 1 and will mark Target’s largest single partnership deal to date in terms of inventory.

Target has been seeking out designer collaborations like this for the last decade. When the Missoni line hit Target shelves in the fall of 2011, it sold out in a matter of hours. This time around Tesija said there will be even larger quantities of items stocked, but stores are still expecting to sell out quickly.

It might seem an unlikely partnership for Target to team up with high-priced designers. But Naughton explained that the products in the holiday collection are not representative of the entire line of a designer but are instead a small sampling of products that Target shoppers may not have had exposure to in the past. The promotion drives sales for Target and increases the awareness of the designers in an untapped market.

“They build trust,” Naughton said, “They don’t necessarily bring down a designer’s authenticity because it’s just a splash of what they have to offer.” His firm predicts the Neiman Marcus partnership could increase holiday sales by as much as 1 percent.

Target’s stock rose $1.02, or almost 2 percent, to close at $62.40.