More Target sales are going Red, as a growing percentage of customers are using the retailer’s debit and credit REDcards.
In doing so, the company is able to avoid interchange expenses related to acceptance of traditional network-branded cards, and it can collect more valuable customer data.
During the three months ended May 3, 11.3 percent of sales in U.S. Target stores were conducted with Target debit cards, up from 8.6 percent that were during the same period last year, the retailer reported May 21 with the company’s fiscal first quarter earnings. Target credit cards were used for 9.1 percent of sales, up from 8.5 percent. Total REDcard penetration during the quarter was 20.4 percent of sales, up from 17.1 percent.
Sales for the company's U.S. operations for the quarter totaled $16.7 billion, up slightly from $16.6 billion during the same period last year. Target operated 1,789 total stores at the end of the quarter, up from 1,784 a year earlier.
Canadian operations also saw REDcard increases, but the penetration was much less. During the period, 2.1 percent of sales were conducted using Target debit cards, up from 1 percent a year earlier. Target credit cards were used for 1.8 percent of sales, also up from 1 percent. Total REDcard penetration in Target’s Canadian operations was 3.9 percent, up from 2 percent. The company's Canadian operations reported sales of $393 million, up from $86 million. Target operated 127 Canadian retail stores at the end of the period, up from 24 a year earlier and from 124 at the beginning of February.
During the quarter, Target announced that, beginning in early 2015, the company’s entire REDcard portfolio will convert to MasterCard-branded chip-and-PIN cards, as will existing co-branded cards. The company, which also expects to have chip-enabled readers in its stores by September, recorded a $13 million expense during the first quarter of 2014 related to the decision to convert cards to the EMV format.
Target’s decision to convert was the result of a data breach that occurred in December in which an intruder gained unauthorized access to its network and stole payment card and other guest information. The company incurred $18 million of net expense during the quarter, reflecting $26 million of total expenses partially offset by the recognition of an $8 million insurance receivable.
That expense, however, did not include any accrual for the potential payment card network claims for counterfeit fraud losses, Target said in its earnings announcement. “The amount accrued to date for probable losses on potential payment card network claims consists solely of operating expense reimbursement obligations,” the retailer said. “At this time, the company is unable to reasonably estimate a range of possible losses on the payment card networks potential claims in excess of the amount accrued.”
Breach fallout fading?
During a conference call with analysts to discuss the quarter’s earnings on May 21, Kathee Tesija, Target chief merchandising and supply chain officer, noted that one of the reasons Target is switching to EMV is to help bring back customers put off by the breach.
“Consumer survey data shows that we've made substantial progress on measures of Target's favorability and integrity in the U.S., and they are approaching levels we were seeing prior to the data breach,” she said.
However, while trust measures have improved, Target still needs to make more progress to restore them to pre-breach levels, Tesija said. “That's why we're focused on delivering on our commitment to accelerate the rollout of chip-and-PIN on our cards and in our stores, along with many other visible steps we are taking to increase the security of the entire U.S. card payment system,” she said.
Target during the quarter ramped up REDcard offers, and by the end of the quarter it was making offers with the same frequency as before the breach, John Mulligan, Target chief financial officer and interim CEO, said on the call.
“When we make an offer, the application rate for our credit card has largely recovered to pre-breach levels, but the rate for the debit card is responding less quickly,” he said. “As a result, we expect slower U.S. REDcard penetration growth in the second quarter, up between 200 and 300 basis points from last year.”
Looking ahead, and as part of a broader effort to rebuild traffic and sales, Target intends to work to reaccelerate REDcard growth, particularly the debit product, with an enhanced focus on the role store staff play in generating REDcard applications, Mulligan said.