Target Stock: 2 Big Reasons to Take Another Look


Consumer-facing retailers haven't had the best start to 2013. The expiration of the payroll tax holiday, coupled with an extra chilly spring, kept many shoppers out of store checkout lines.

Target stock wasn't immune to those pressures. The retailer posted a 0.6% drop in comparable sales vs. a 5.3% rise a year ago. Target called the results "disappointing," while slicing its sales and earnings guidance for the rest of the year.

Source: Target.

However, there are some important numbers moving in Target's direction right now. It is succeeding in boosting customer loyalty and in its expansion into Canada. Those strategies could be setting up the company -- and the stock -- for big future gains.

Seeing red
Take Target's loyalty card. The percentage of sales that were made by members of its Red Card program leapt to 17.1%, from 11.6% in the year-ago period. Sure, that's a far cry from the 33% of U.S. transactions that Starbucks books through its loyalty program. But it's a good start. Considering that Starbucks credits its rewards card with helping it notch industry-leading sales growth, Target is moving in the right direction. As the coffee king knows, rewards members tend to be more engaged shoppers.

In fact, Red Card loyalty members spend 50% more at Target stores each year than non-members do. Again, that's not as good as has managed. The Internet giant's average sales are estimated to be twice as high for its Prime members than non-Prime customers. However, Target is in good retail company.

But the best news here is that Target still has room to grow. It first launched its loyalty card in Kansas City. The penetration rate there is 20% and still rising. That suggests the company can substantially improve its 17% national rate from here.

Blame Canada
There's also the potential for growth from Canada. Target opened its first 24 stores in the country last quarter, and it plans to cut the ribbon on 124 locations there by the end of the year. That's a lightning-quick expansion pace for year one, considering it took 10 years for Target to get to the same number of stores in the U.S. And that store footprint will already be massive, roughly equal to the count Target has in Florida, its third biggest U.S. presence behind Texas and California.

However, this huge expansion hasn't come cheap. Target invested about $1 billion on Canada growth in 2012, and plans an additional $1.5 billion in spending there this year. Target also expects to take another earnings hit from the Canadian ramp up -- to the tune of $0.45 a share this year, after a $0.48 loss in 2012.

Looking ahead
The good news is that all of those heavy investments should start to pay off around the fourth quarter, when Target expects the Canadian business to begin pitching in profits. That's around the same time that investments in customer engagement will be showing up as higher holiday sales. Target started the year on a down note but could see a strong finish.

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Fool contributor Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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