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(Reuters) - Target Corp (TGT.N) on Thursday said it expects more shoppers this holiday season to adopt its store credit and debit cards, a key tool that draws customers to the discount chain's stores and helped it report a bigger than expected third-quarter profit.
Target said 14 percent of sales during the third quarter were paid for with its debit and credit cards, compared with 9.5 percent a year earlier. The cards offer a 5 percent discount to foster customer loyalty.
"The RedCard is really a way to differentiate themselves and a way to push growth," said Edward Jones analyst Brian Yarbrough.
The retailer forecasts that the percentage of sales made through the card would again increase this quarter, by 4 points compared to a year earlier, and sees more room left for growth. A Target executive pointed to the Kansas City where the RedCards were first introduced and said they accounted for 20 percent of the sales.
Target expects same-store sales to be up 2 to 3 percent this holiday quarter despite what one executive said would be a "highly competitive and promotional" Christmas period.
Target has tweaked its strategy to try to increase its market share during the holiday season. It is offering to match certain online retailers' prices and will open its stores at 9 p.m. on Thanksgiving Day, rather than staying closed for that holiday.
The company has been opening smaller city stores and is set to open its first Canadian stores in 2013. It will also sell a line of holiday goods with upscale department store Neiman Marcus Group Inc NMRCUS.UL in December.
Target Chief Executive Gregg Steinhafel told analysts that the number of visits by shoppers to the CityTarget stores, which attract a younger crowd, has been strong.
Target said it had earned $637 million, or 96 cents per share, in the third quarter ended on October 27, up from $555 million, or 82 cents per share, a year earlier.
Excluding a gain from the pending sale of its credit card receivables, the profit was 81 cents per share, 4 cents more than what Wall Street analysts were expecting, according to Thomson Reuters I/B/E/S.
Adding more food, particularly perishables, and offering the 5-percent card discounts weighed on profitability; gross margin during the quarter slipped 0.2 points to 30.3 percent of sales. But Edward Jones' Yarborough said Target had managed costs to minimize the impact.
The company said it expected to earn between $1.45 and $1.55 per share in the holiday quarter, including expenses linked to its entry into Canada next year. That compares with analysts' forecasts of $1.51.
Target previously said third-quarter sales had increased 3.4 percent to $16.60 billion. Sales at stores open at least a year were up 2.9 percent, helped by higher prices and customers' buying more items per transaction.
Shares of Target were up $1, or 1.6 percent, at $61.38 in late morning trading on the New York Stock Exchange.
Reporting by Phil Wahba in New York and Jessica Wohl in Chicago; Editing by Jeffrey Benkoe, Lisa Von Ahn and Leslie Gevirtz