The Bright Spot in Target's Dark Earnings Report

There wasn't much to like in Target's (NYSE: TGT  ) latest earnings results. Profits were down. Sales were lower than expected. And the company even ratcheted back its expectations for the rest of the year.

So, it shouldn't come as a surprise that investors ignored the good news that Target tried to play up, including a successful launch in Canada, much higher digital sales, and strong results from its city-sized store experiments. Wall Street sold the stock off anyway, sending shares down 4%.

But there was one piece of news buried in the retailer's conference call that I think could trump all of that: Target's customers are getting more loyal.

Sign me up
Management said that the company's Red Card, its rewards program that offers shoppers 5% off, rose to a 17% penetration rate among its customer base. That's up from just 12% a year before.

If Target can keep converting shoppers to members, loyalty card growth should lay the foundation for big sales gains down the road.

Consider just how much of an impact these cards have had on some other businesses:

  • Starbucks (NASDAQ: SBUX  ) : The coffee king is also the king of rewards cards. Starbucks counts over 6 million members in its loyalty program, who account for more than 30% of the company's U.S. transactions. Last quarter, those members added 32% more dollars onto their cards than in the year-ago period. We're talking billions of dollars. Starbucks' management credits that success with helping the company keep sales growth humming along, and coming in much less choppy than at other retailers.
     
  • Amazon.com (NASDAQ: AMZN  ) : We know that Amazon customers spend more at the company's site after they make a switch to becoming members of its Prime shipping service. A lot more. By some estimates, we're talking $1,224 in annual spending at the site, or double what non-Prime customers spend. Amazon can thank its Prime service for helping deliver huge sales growth, which is why boosting the number of products it offers through the service remains such a big priority for the company.

Hitting the target
Target has seen equally encouraging early results on its customers' spending patterns. Households tend to boost their spending in stores by 50% after they start using the Red Card. Sure, those sales put pressure on profits, as more of them qualify for the 5% discount. But that's a good trade-off if it makes Target the first choice for more consumers' shopping needs.

The best news for Target here is that its oldest market, Kansas City, has a 20% penetration rate for its card, and that figure is still growing. So, the retailer has a big opportunity ahead to keep adding to its member base, increasing customer loyalty in the process.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.


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