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Target Corporation (NYSE:TGT)

August 18, 2011 9:30 am ET

Executives

Michael Francis - Chief Marketing Officer and Executive Vice President

Kathryn Tesija - Executive Vice President of Merchandising

Gregg Steinhafel - Chairman, Chief Executive Officer and President

Douglas Scovanner - Chief Financial Officer, Chief Accounting Officer and Executive Vice President

Analysts

Mark Miller - William Blair & Company L.L.C.

Bernard Sosnick - Gilford Securities Inc.

Robert Drbul - Barclays Capital

Craig Johnson - Mirage Research

Greg Melich - ISI Group Inc.

Daniel Binder - Jefferies & Company, Inc.

Neil Currie - Dahlman Rose & Company, LLC

Todd Duvick - BofA Merrill Lynch

Faye Landes - Consumer Edge Research, LLC

Jack Balos - Midwood Research

Adrianne Shapira - Goldman Sachs Group Inc.

Charles Grom - Deutsche Bank AG

Mark Wiltamuth - Morgan Stanley

Margaret Gilliam

Wayne Hood - BMO Capital Markets U.S.

Robert Ohmes - BofA Merrill Lynch

Deborah Weinswig - Citigroup Inc

David Strasser - Janney Montgomery Scott LLC

Unknown Analyst -

Gregg Steinhafel

Good morning, everyone. Before we get started, I just thought I'd just give you a time reference for today. There's going to be 4 presentations this morning that should take about an hour and then we'll have about an hour left for Q&A. So with that, I will launch into it.

I'm Gregg Steinhafel, Chairman, President and CEO of Target Corporation. Welcome to all of you here with us today, as well as those of you listening online. I'm excited to be here in New York this morning to provide our outlook for the remainder of the year and share a more detailed roadmap in support of our expectation that Target will generate $100 billion or more in sales and $8 or more in earnings per share by 2017.

I'm also pleased to be joined by other members of Target's executive team, including Kathy Tesija, Executive Vice President of Merchandising, who will describe many of the merchandising initiatives we are pursuing to drive profitable incremental sales growth; Michael Francis, Executive Vice President and Chief Marketing Officer, who will outline efforts to elevate Target's brand affinity both in the U.S. and Canada; and Doug Scovanner, Executive Vice President and Chief Financial Officer, who will provide additional insight into our Canadian market entry and the financial plans which support our long-term goals.

In the process, we intend to convey our confidence that we have the right team, the right strategies and the right operational plan in place to achieve our goals over time. Also, as a reminder, any forward-looking statements that we make this morning are subject to risks and uncertainties, the most important of which are described in our SEC filings.

Obviously, we focus a great deal of energy on maximizing Target's current performance, constantly adjusting to changes in the economic and consumer environment. At the same time, we believe it's useful to extend our outlook and better understand what Target could look like when today's economic turmoil, the potential sale of our credit cards receivable and our Canadian market entry are all behind us. We have a clear vision of the path to this future and we believe it's based on very reasonable and reachable expectations.

Our plans for 2011 have largely held up through the first half of this year. And we continue to balance our focus between maximizing performance today, while investing at strategies to ensure that Target continues to deliver profitable growth in the longer term.

Yesterday, we announced our second quarter earnings results, and we're pleased with our financial performance so far this year. While sales were softer than we'd hoped in the first quarter, the pace in the second quarter accelerated meaningfully, and we expect that momentum to carry into the fall.

Retail margins have met our expectations and the profitability of our Credit Card segment has been even stronger than we expected going into the year. In addition, we've retired more shares earlier in the year than we originally planned, creating a considerable benefit to earnings per share. As a result in the second quarter, we set another record high for EPS even in light of dilution from our Canadian investments.

Over the past few years, we've worked very hard to right size our expense structure, allowing Target to generate strong financial results, even in a relatively soft sales environment. The disciplines we've developed continue to pay dividends today, and we don't intend to back away from them in the future regardless of the sales environment.

As we look ahead to fall, we expect that we'll continue to enjoy strong financial performance while we prepare for the launch of City Target in 2012 and finalize our plans for Target's Canadian market entry in early 2013. For the longer term, we have a balanced portfolio of growth initiatives that we expect to drive our sales to $100 billion or more within 6 years.

First, in existing stores, we expect to continue to enjoy moderately positive comparable store sales trends going forward. We'll achieve this growth by delivering a multichannel guest experience, innovating in our assortments and presentation throughout the store and supplementing those efforts with our remodel program and loyalty initiatives like 5% Rewards. As we plan our sales, we believe it's likely that the current economic recovery will continue to evolve slowly and unevenly, producing only modest annual increases in GDP and consumer spending. Against that backdrop, we'll work to gain greater loyalty in wallet share from our guests, particularly as they increase their shopping frequency in response to our remodels in 5% Rewards program.

Beyond growth from the 4 walls of our existing stores, we expect to continue to modestly grow the store count of our current formats in the United States at a much slower pace than we grew prior to the recession. As we've said before, we have the desire, capital and team that would allow us to grow more quickly, but our baseline economic assumptions are not expected to create the breadth of new store opportunities we've enjoyed in the boom years.

In the U.S., we'll supplement growth of our current formats by opening City Target locations in dense urban markets. We expect to open 5 pilot locations of this format in 4 markets next year. Based on the results of those initial stores, we'll make a determination regarding how many more stores we'll open in late 2013 and beyond. We've identified hundreds of potential trade areas that could accommodate this format over time and we'll study and learn from the results in these initial pilot locations to understand how much of our longer-term growth could come from this smaller format.

Outside of sales in our physical stores, we expect that Target's online and mobile sales will continue to grow at a rapid pace as we invest in these platforms and consumers become increasingly comfortable with digital technologies. We're excited about the upcoming launch of the new target.com in the next few weeks, and we'll continue to take a holistic, multichannel approach to driving Target's sales both in stores and online.

Finally, we expect our Canadian Target stores will add a meaningful increment to Target's total sales over the next 6 years, contributing $6 billion or more in sales by 2017. Given market conditions and the locations we expect to open in Canada, we anticipate higher sales productivity in these stores, compared to our U.S. average. Combined, we believe these growth drivers will contribute more than $30 billion to Target's sales in the next 6 years.

Like a well-diversified portfolio, our growth is not overly dependent on any single initiative. While each of them in isolation might perform above or below our expectation, we're confident that together, they will deliver our overall sales growth. Translating $100 billion or more in sales to $8 or more in EPS is quite straightforward. We expect to grow our sales by generally maintaining retail operating margins at current levels. I think our recent experience demonstrates our ability to meet that expectation.

Last year, our retail EBITDA margin was 0.5% higher than in 2007, even though the economy continues to challenge our discretionary sales growth and programs like PFresh and 5% REDcard Rewards pressures are gross margin rates. As we look at the mix of our sales, we believe our current retail operating margins are appropriate, not too rich and not too thin. As a result, we believe our best opportunity to create value is by driving top line sales increases while generally preserving these margins.

We expect that Target will no longer own our credit card receivables allowing us to reduce debt and retire shares, while still learning income based on the profits those receivables will continue to generate. We expect healthy retail operating margins in Canada, given the sites we've selected and the retail growth restrictions that exist in many of those markets. And we expect to generate excess cash that we can use to retire a meaningful portion of our outstanding shares while still supporting healthy dividend growth, while we believe these expectations are reasonable and we're confident that our talented team around the world is up to the challenge of making them a reality.

In every part of our business, we are constantly striving to achieve appropriate balance. We work to offer the right mix of national. And on brands, the right blend of fashion and basics, the right mix of wants and needs, the right assortment of products in stores and online and the right balance across both sides of our "Expect More. Pay Less." brand promise. As we develop and implement our strategic plans, we work to balance between efforts to drive our business today, further refining and enhancing execution of our 5% Rewards, store remodels and multichannel integration, with efforts to drive our longer-term performance for the introduction of City Target and our expansion into Canada.

As I look at Target today, I believe our efforts are appropriately balanced between the near term and the long term, and our teams are strongly aligned in the implementation of each of these initiatives. At Target, we've never been more excited about our brand and confident in the strategies that are driving our growth. While the year so far has had its ups and downs, we're quite pleased with the momentum we have going into the fall and we're confident that we have the right plans in place and the best team in retail to drive our success, both this year and over time.

Now Kathy will outline Target's merchandising plans that will support our growth and financial success going forward.

Kathryn Tesija

Thanks, Gregg. In merchandising, we're constantly looking for new ways to engage and inspire our guests, deepening their loyalty by delivering on both sides of our "Expect More. Pay Less." brand promise. We push ourselves not only to delight our guests today, but to anticipate how they want to engage with Target in the future. This forward-looking focus drove our PFresh remodel program, which was developed well before the recession. This format represents Target's latest thinking in our ongoing efforts to reinvent our store layout and to stay relevant in the eyes of our guests because relevance drive sales and trips.

As the recession took hold, value became an even stronger imperative so we ramped up our value proposition, launching Our Low Price Promise and emphasizing value in our marketing and in-store signing. These efforts put us in a great position. And now by the end of October, well over half of our general merchandise stores, just under 900 locations, will incorporate merchandising innovations throughout the store including our expanded food layout, something we've accomplished in just 3 short years. And the credibility we've gained in terms of price perception will continue to drive sales regardless of the external economic conditions.

Today, we continue to work tirelessly to anticipate both current and long-term trends and adjust our approach to stay ahead of what's changing. While that means understanding the latest patterns and colors it goes well beyond fashion and impacts every area of our business. It means anticipating the changing needs of the boomer generation while preparing for the growing importance of millennials. It means integrating multicultural merchandising and marketing into every initiative and understanding the significant opportunity we have to deepen the bond with our Hispanic guests. It means anticipating the growth of online and mobile technologies and developing a truly multichannel merchandising approach.

In our pharmacies, it means anticipating the potential impacts of healthcare reform, while preparing for patent expirations of blockbuster drugs. In the allocation of physical space in our stores, it means identifying opportunities to add productive space in categories like food while right-sizing the space for segments like movies, music and books. Space allocation is a key factor in planning our City Target and Canadian merchandising strategies because in both cases, we'll have smaller sales floors than we typically operate in the U.S. stores today. And of course, it means responding rapidly to changes in the economic environment, whether that means adjusting unit inventories in the face of cost inflation or understanding that as guests begun to eat more at home during the recession, they were willing to spend more on high-quality cookware.

We're always learning and adapting as the economy fluctuates and our guests change their shopping habits, and we'll continue to evolve. We're quite pleased with our merchandising strategy, the current balance of our assortments and the health of our brand. We're happy with the sales momentum we gained in the second quarter and we're confident that our plans position us for success longer term.

As we develop our merchandising plans, we challenge ourselves to look beyond current paradigms to provide our guests the products they want, when and where they want them. We're excited about the experience guests will receive in our new target.com site that we'll launch later this month. The new site will be more visually appealing and customized to match each guest profile. It also will provide more detail in expert product reviews, while incorporating capability for user-generated video and photo content along with social features. And just as we focus on providing a best-in-class checkout process in our stores, online functionality for checkout and account management have been streamlined to make the experience as quick and straightforward as possible.

The relaunch of target.com is only the first step towards creating a more robust, multichannel experience. Our multichannel guests are much more valuable than guests who interact with us in a single channel. They shop more often and their spending is dramatically higher.

In our mom and baby assortment, purchases of essentials still occur primarily in our stores, but online sales of baby furniture are growing rapidly. Today, they're equivalent to sales in about 1,400 of our stores. To ensure the guest experience is seamless and coordinated no matter the shopping channel, our mom and baby assortment decisions are integrated across all platforms.

Our relaunch of the Smith & Hawken brand earlier this year is another multichannel example. From the beginning, their product development and merchandising strategies were integrated between our stores and online. When we relaunched the brand, our stores received a more limited assortment focused on lower price points, and our store teams were prepared to direct guests online where they could find a broader assortment and included higher quality teak furniture with white glove delivery and assembly.

Beyond our website, we're laser-focused on the rapid growth of mobile technology. Already, more than 10% of total visits to our website begin on a mobile device, and mobile traffic is running more than double last year's levels. We have 30 million unique visitors using mobile devices, and we expect visits on these devices to exceed traditional online traffic by 2015. We're pleased that Target was named 2010 Mobile Retailer of the Year by Mobile Commerce Daily, and that our iPad app just received a People's Choice Webby Award in June. And we know we'll need to continue to innovate rapidly in this space. To that end, we're relaunching our mobile site later this fall, which allows us to integrate the technology with our new target.com site and offer our guests an enhanced layout, greater usability and integrated social features.

In our stores, where a vast majority of our sales still occur, we continue to innovate and incorporate the latest thinking in store design and presentation into our remodel program. As you know, last year's general merchandise remodels incorporated and expanded food assortment, along with innovations in home, beauty and shoes. This year's remodels incorporate innovations in the newborn infant and toddler area, creating a simplified stress-free environment for new moms and dads. We have removed high walls to create more visibility between gear, supplies and apparel. We also present baby furniture in one easy to browse location, highlighting features and of course, directing guests to target.com where they can find a much deeper assortment.

Next month, we'll transition our domestics area creating a more dominant presentation focused on components, like sheets or blankets, rather than ensembles like an entire bedroom set. This will provide our guests, who today are focused more on replacement purchases of individual items, the ability to see our entire assortment without searching across multiple aisles. This presentation is easier to shop and also more efficient, allowing us to present more items in the same amount of space. And we can use our focal end caps to showcase ensembles for our guests who want to be inspired by how they can pull all of the parts together. We've incorporated this change in remodel stores this year and are very pleased with guest feedback and the impact it's had on sales in the stores.

As we navigated the recent recession, we adjusted our tactics to match what was going on in our guests' lives, keeping within the guard rails of our "Expect More. Pay Less." brand promise, we ramped up our value messaging to stay relevant in that environment. Yet, we didn't abandon and expect more in that side of the brand promise. And today, we're more focused than ever on differentiation to ensure our guests feel compelled to shop Target for all of their wants and needs.

In Apparel, we're excited about the upcoming 20th anniversary of the Merona brand. At just under $2 billion, Merona is already one of the biggest brands. But we believe it can continue to grow, particularly as we work to capture more share from our classic guests. And while C9 by Champion is now at a billion dollar brand, we see room to grow sales through a brand that resonates perfectly with young families and their dedication to healthy and active lives. With Back-to-School, we introduced Vintage Varsity, an exclusive line that was inspired when one of our designers happened upon the Hamilton Wood Type and Printing Museum. We've applied the great design of this uniquely American art form to an exclusive line of clothing for young people and the young at heart.

Our Beauty categories earn an above average gross margin rate, and it's already one of our highest market share areas and that share is growing rapidly as we roll out the Destination Beauty layout in our store remodels. Outside our stores we're seeing rapid growth of online cosmetic sales, which generates great margins on a differentiated assortment.

In Home, we've continued to see strength in our best offerings like Fieldcrest Luxury and Simply Shabby Chic. And on the good end of our assortment, we're very happy with the results from the relaunch of our Room Essentials brand where we've improved quality, standardized color palette and created much more compelling packaging. Today, we're engaged in a similar effort with our Home brand, which is positioned as our core better offering. Beyond clarifying this brand's attributes, we believe we have an opportunity to add more fashion content and take appropriate risks, pushing farther ahead on the trend curve. And we continue to work with world-class designers to bring some of the most exciting limited time offers to our guests at amazing prices.

Later this fall, we'll roll out a new exclusive kids live, Harajuku Mini by singer and designer Gwen Stefani. Although it's not in stores yet, this line is already being praised on social media sites. It's been one of our most popular Facebook posts of the year and the #1 trending topic on sites like Yahoo! and Google. And following our successful partnership with Calypso St. Bart earlier this summer, we're excited to launch Missoni for Target in September. Not only will this program be the biggest ever in size for Target, but the amount of buzz Missoni is creating is unprecedented for our designer partnerships.

The line of more than 400 items across both Apparel and Home already has garnered attention in the most coveted fashion and shelter publications. But differentiation doesn't begin and end in our Fashion categories. We want Target's guests to expect more in every assortment our store. In electronics, we differentiate with programs like Bullseye Mobile, which continues to exceed expectations; and our electronics trade-in program, which provides value for our guests and drive sales through the entire store. We've added services like delivery and installation with industry-leading prices. And we've launched My Target Tech, a free service, which offers guests troubleshooting and warranty assistance on any electronic item they purchase at Target. Of course, we're also seeing great results on tablets. We've seen sustained strength in iPads and we're excited to add more exclusive offerings like the new Google e-reader.

In Healthcare, Target Pharmacy has won a JD Power Award for 4 years running, and we're working hard to keep that streak going. Our successful Ask Me campaign highlights the great service and insights our pharmacists offer our guests, and we're continuing to look for opportunities for our pharmacists to move beyond the counter and engage with guests as they shop.

In Toys, we're a destination for the big brand names guests love like Lego, NERF and Barbie. And we also offer compelling Target-only extensions from these family favorite brands, which is critical, particularly as we gear up for the holiday season. We continue to differentiate with exclusive items and licenses. With the launch of Cars 2 earlier this year, Target earned a very high share of related sales, driven by dozens of exclusive items and theatrical in-store presentations that were impossible to miss.

And in Sporting Goods, we're seeing remarkable results in Fan Central, which offers great prices on high quality, team-related apparel. This program is now in every store, offering a customized assortment across every major league and team. It has quickly become the most productive space in the sporting goods floor pad.

Everyone in retail understands that this is an incredibly dynamic and competitive marketplace. No one can maintain a leadership position by continuing to do what worked yesterday, and the pace of change continues to accelerate. We need to be willing to constantly adapt, take risks and understand where our guests are headed. Target is committed to innovating more quickly than ever while staying true to the principles that guided our success and created a strong brand and passionately loyal guests.

Now Michael will provide some insights into our marketing efforts and provide details on our plans to enter the Canadian market beginning in 2013. Michael?

Michael Francis

Thanks, Kathy. Well, as you have just heard, we have many exciting initiatives underway in merchandising and we designed our marketing strategies to work in concert with them to drive relevance, loyalty and ultimately, sales. We're most effective when we employ an integrated approach to consistently brings our brand to life in our assortments, in our stores and online.

While our marketing tactics and vehicles continue to evolve over time, we remain firmly committed to our brand principles and our focus on the guest. The good news is that through all of the economic turmoil we've encountered over the past few years, our brand has never been stronger. We continue to receive very high scores for both satisfaction and affinity when compared with our competitive set and our own past performance.

We also see the same favorable comparisons when we survey consumers on where's your favorite place to shop. And notably, when our brand is evaluated next to a set of global brands across industries, we share a leadership position comparable to such iconic brands as Apple, Nike and Google. We're proud of the strong brand position we've established, and we're committed to maintaining it.

In 2011, that commitment led us to focus our marketing efforts on 4 objectives: winning a greater share of grocery sales as we add more food to our merchandise assortment, redefining the guest experience through continued store redesign and remodels, being dominant at seasons throughout the year and further enhancing Target's fashion credibility with new and exclusive designer partnerships and brands.

As we continue to remodel our stores and expand our food assortment, we need to redefine what a trip to Target is all about and win a bigger share of our guest grocery trips. By delivering grocery messaging in a more frequent and consistent cadence, we increase mom's awareness of our great food prices, our freshness and our selection. And we enhance Target's relevance as a shopping destination. One way we do this is by drawing on the power of our Life's a Moving Target campaign to help us tell our grocery story.

[Presentation]

The strength of our Life's a Moving Target campaign is that it works for wants, needs, seasonal promotions, pop cultural commentary, you name it. This bright, funny, surprising and deceptively simple series of 15-second spots has proven to be extremely effective at portraying the incredible mix of categories and products that Target offers, accomplishing it with what can only be described as a style that is uniquely Target.

[Presentation]

This campaign has been a huge hit with both critics and our guests. The honesty and the insight captured in these spots, not to mention the humor, helps make that all-important emotional connection with our guests and drives loyalty and ultimately, incremental sales. When we feature an item in one of these spots, we see about a 50% sales lift on that item compared to prior trend. This year, we've created more than 75 Life's a Moving Target spots and our plan is to extend the campaign into 2012, with an even greater emphasis on grocery and essentials.

Making a splash for summer or back-to-school, Halloween or holiday remains critical to our continued brand differentiation and profitable sales growth. When we dominate a season, we turn Target into a destination, keeping us top of mind for guests and driving trips throughout the year. This summer, we pledged to Make Summer Funner. Sure, it may have raised the eyebrows of a few grammar teachers, but our campaign showed guests that whether they were going to the pool with the kids or entertaining in the backyard, Target has the summer essentials at great prices to make summer memorable.

[Presentation]

Target brought this Summer Funner campaign to families through an amazing assortment of summer products in stores and online fun finder application on Facebook and 2 larger-than-life consumer events. Overall, the campaign achieved our marketing objectives and proved usually popular with our guests.

For Back-to-School this year, our theme is School Takes A Lot. Target Has It All. This campaign showcases Target as the place to stock up on everything mom has on her school checklist from food to supplies to apparel. We've created customized television spots to speak to multiple audiences, including the Hispanic market and this one.

[Presentation]

That particular spot has been so popular that we received literally hundreds of requests to make this song available for download on iTunes. Guests have also enjoyed this spot.

[Presentation]

In addition to broadcast spots, our Back-to-School campaign this year includes online ads, in-store signing, radio spots, our weekly circular, direct mail that went up to more than 4 million guests and magazine and newspaper ads focused on the 5% savings that mom can earn on all her Back-to-School purchases made with our REDcard.

Back-to-College is a dominant season for Target and beyond the valuable sales of producers today, it provides us with the opportunity to begin speaking directly to our future core guests. Newly independent young people who are living on their own for the first time and looking for that one store that's both affordable and fun to shop. This year, our priority was to drive sales by meeting students where they live, which is namely online. Among the ways we connected in interactive and customizable checklists for newly independents, discovering that they have a whole new set of wants and needs. And online videos that capture that Target wink and it have now gone viral.

[Presentation]

We've also turned the thumbs-up icon on Facebook into a game show buzzer by offering amazing daily deals for the first 1,000 people to like a deal through Facebook. Our first promotion wasn't available long as the response exceeded our expectations while creating a ton of buzz online. But even Internet-savvy college students loved to physically shop our stores, so we continue to make it fun and easy. This marks our 10th year of providing students free bus transportation between their college campus and their local Target store for a private after-hour shopping event. This program has proven to be such a success, that this year we bumped up the number of participating campuses from 45 to 65.

Across retail in the U.S., Halloween related sales generate nearly $6 billion. Given our assortment and appeal to young families, we already have a very healthy share of those sales. But we believe we're in a great position to capture an even larger portion. When you're a kid, you instinctively know which homes are the best in the neighborhood to visit on Halloween. This year, we want to take the stress out of Halloween shopping and help every mom turn her home into one of those good houses, a place of wonderment and charm. A sensational in-store signing package will be supported by an aggressive campaign that includes circular coverage, radio plus spots like this one.

[Presentation]

As you may recall, Target began last year's holiday season before Thanksgiving with a very successful 4-day sale, helping guests get the amazing deals they expect on Black Friday without the hassle or crowds. And we opened one hour earlier on Black Friday from the previous year to give guests even more time to take in the savings of our 2-day sale. Bold overhead signing, and more than 50 in-caps bins and pallets made it easy for our guests to spot all of the best deals. These efforts led to a very strong start for our 2010 holiday season. While it's still too early to give out the details for holiday 2011, we're confident that our great products, promotional offerings and exciting campaigns will build on last year's successes, and make Target the top shopping destination throughout the holiday season this year.

Beyond seasonal events, we're continuing our year-round promotional approach at home, positioning HGTV's Sabrina Soto as a design consultant, confidante, life coach and cheerleader. The home campaign theme is Peace, Love, Target.

[Presentation]

The print campaign confidently shows how a single beautiful piece can tie an entire room together. One great feature of the print campaign are the QR codes that take you instantly into these informative online videos where Sabrina will show you how easy it is to add style to any room. This multichannel approach will only grow in importance. Research now shows that Home is the #1 category for inspiring in-store sales through our online presence.

As we look longer term, our reckoning focus will focus on priorities that build on the brand equities that we've already earned and continue to enhance our brand over time. For example, we expect to continue to lead in seasonal events, capturing those trips with a purpose that families make every year; gain more and more everyday trips, whether it's a mid-week grocery fill-in trip or a visit to refill a prescription; be a destination for new and exclusive items in every part of the store, providing differentiation and reinforcing the Expect More side of our brand promise; build on Target's fashion credibility. Target simply wouldn't be Target without our style, trend and fashion credibility. And we'll continue to deliver the hottest trends to our guests everyday. Focus on the growing population and buying power of the Hispanic guest. Recent brand equity surveys have shown that Hispanics already have a very strong affinity for Target, so we continue to tailor our merchandise assortments and our marketing in Spanish-speaking communities to ensure we further strengthen our bond with these guests. And finally, we'll maintain our focus on appealing to young families. We'll also work to earn our guest loyalty, whether they're growing into that life stage or have grown beyond it.

Just as guest insights help drive our business decisions in the U.S., they also are integral to our planning and our ultimate success in Canada. As part of my role overseeing Target's entry into Canada, I've spent a considerable amount of time there this year, along with our Target Canadian leadership team. We've been visiting cities throughout Canada and conducting what we like to call listening and learning tours. The valuable insights gained from these conversations is helping us to clarify our plans and develop our strategy. We know we must tailor our brand and operations to make them relevant for our future Target Canada guests. We expect our core Canadian guest profile will look quite similar to our U.S. profile, young, active, well-educated and with children at home. We are pleased to learn that nearly 70% of Canadians are already familiar with the Target brand. 11% have shopped our stores in the past year and more than 30,000 are currently REDcard holders. And many Canadians who haven't yet shopped our stores have likely engaged with the Target brand at some point. Whether they've seen one of our commercials on network television or they've taken a peek at our weekly ad in a U.S.-based newspaper, they've had a chance to experience what Target has to offer. And we've already heard from them through excited Facebook updates, tweets and mainstream media stories. So we know they're excited to have us coming in 2013.

We continue to build on that awareness. Already this summer we posted a Media Day in Chicago for the Canadian press, and a breakfast with media in advance of the Honda Indy race in Toronto. Target took over that race with oversized Target shopping carts on the scene and Target ambassadors handing out branded reusable shopping bags. Lady Luck was clearly with us as Target's driver Dario Franchitti earned first place and his teammate, Scott Dixon, took second.

The Canadian retail market offers a compelling growth opportunity for Target. While strong retailers, including some from the U.S. have been operating in Canada for years, the Canadian general merchandise market remains less crowded than the U.S. Through our purchase of up to 220 Zeller leasehold interests and following conversion of a subset of these sites into Target stores, we expect to bring a fresh approach into the market with our clean and bright stores, tailored merchandise assortments and outstanding guest service.

Opening the doors to our Target Canada stores in 2013 means that our teams are working around the clock to develop the appropriate systems and processes. While the details for our supply chain e-commerce, marketing and merchandising strategies are still being determined, we're pleased with our progress.

We have an active landing page and our target.ca site and will soon enable the potential Canadian team members to view and apply for open positions. We've recently announced that we'll be building a distribution center in Cornwall, Canada and outsourcing all operations including hiring and employment to an outside logistics provider. We've hired Toronto-based MDC partners to lead the development of our overall marketing efforts in Canada and we've also engaged Québec-based octane to gain insights into this unique market.

We've announced that we'll be extending our legacy of 5% giving, our long history of being a good neighbor and active engagement with local and national partners in Canada, which we've learned is very important to our future Canadian guests. And we continue to develop an overall merchandising strategy for the Canadian segment.

While we expect to bring the breadth of Target's U.S. merchandise assortments to our Canadian guests, we're conducting an in-depth evaluation of the Canadian consumer and the competitive environment to determine how we want to allocate space to each category in our Target Canada stores.

In both the U.S. and in Canada, we'll continue seeking innovative ways to create buzz and to generate excitement through bold initiatives and attention-grabbing stunts. Just last year at Fashion Week, we pulled off an incredible event at the trendy Standard Hotel here in New York, one of the hottest places to be, attracting a kind of free-spirited clientele who feel it unnecessary to draw the drapes before checking into their room. An underground movement of hipster voyeurs makes a regular pilgrimage to the Standard, which is precisely why we decided to take over the hotel during fashion week and stage a G-rated fashion show that blurred the lines between haute couture and performance art.

In music, we continue to have exclusive partnerships with top named talent like Keith Urban, the Black Eyed Peas and Taylor Swift. And we're not just offering an exclusive track or 2, we're working with the artist to build on the emotional bonds that they have with their fans. Nowhere is this more evident than in this spot we've recently created with Beyoncé.

[Presentation]

Whatever the campaign, we strive to add that extra layer to differentiate Target from our competitors and to ensure that our message not only rises above the clutter, but also leaves even our most famous guests wholly-enamored with all things Target. Here are just a few more ways that Target has been leveraging pop culture to advance our brand.

[Presentation]

Target has never been more relevant in the U.S. and we're already on our way to building the same strong brand equities in Canada. Next up, Doug will discuss how our strategies are expected to generate strong financial results over time. Doug?

Douglas Scovanner

Good morning. Today, I'll cover 3 topics with you. I'll briefly review our outlook for the rest of the year, which we covered in much more detail yesterday in our conference call, then I'll review why we're so excited about our investment in Canada. And finally, I'll describe in some detail how we plan to reach $100 billion or more in sales and achieve $8 or more in earnings per share by 2017.

At the beginning of this year, we set our prospects for earnings growth would likely be stronger in the fall than in the spring, due in large part to the exceptional margin strength we delivered in our U.S. Retail segment in the spring of 2010. Our U.S. Retail segment margin structure remains quite strong as we turned the corner into the fall season in 2011, sales growth remains the key variable and our momentum on that score is good.

Overall, our EPS prospects for the year remain precisely in line with the expectations we laid out 6 months ago, as stronger-than-expected credit card results and more aggressive spring season share repurchase have fully offset the EPS effects of softer U.S. sales growth and modestly higher Canadian dilution.

This outlook translates to a view that we're likely to deliver third quarter EPS performance somewhere in the range of $0.70 to $0.75 compared with $0.74 earned last year. As you recall, last year's figure included about $0.06 of unusual income tax benefits. So on an analytical basis, I believe $0.68 is a more appropriate comparison. Either way, last year's performance was a third quarter record and apples to apples, this year's performance will likely set another third quarter record as well.

For the full year, we now believe we'll deliver EPS in a range of $4.15 to $4.30, which would set another annual record. Compared with last year's base of $3.86, which represents a reported EPS of $4 adjusted for the disclosed $0.14 of income tax benefits, this performance would represent annual EPS growth in the range of about 8% to 11%. Notably, this outlook is in line with the expectations we outlined at the beginning of the year as I described with the 2 elements increasing our EPS offsetting the 2 elements that have been a bit weaker.

While we're focused on the balance of 2011, we should touch on our progress on our 2 transformative transactions which are in flight at this time: our Zellers real estate transaction; and our progress toward an intended sale of our credit card receivables. In a few weeks, we'll make and announce our additional and final lease selections beyond the first 105 we announced in May. And then turn the corner to begin the process of transforming these spectacularly well-located sites in the stores that look, feel and are brand new Target stores.

In some respects, the top 100 Zeller stores have direct parallels to our acquisition of former Montgomery Ward stores about a decade ago, well-located, yet somewhat tired stores that from the day they reopened have consistently generated sales and profits far higher than words ever dreamed of, and today represents some of our best stores in the chain.

Separately, we continue to make progress toward the sale of our credit card receivables and toward negotiation of the elements of a subsequent relationship with a financial institution in a format that meets our objectives and those of a potential partner as well. Such a transaction might occur later this year or early next year, and we'll update you in more detail when we have more to say on this topic.

Now let's turn our attention to our Canadian market entry. When we announced the Zellers transaction in January, we said we expected returns on our invested capital to approximate our U.S. experience. We're not far enough into this process to confirm that this is the case, and more particularly to clarify that we expect to generate after-tax return on all of the capital and all of the cash startup costs involved in this enterprise in the range of 12% to 13%. Given the magnitude of the investment and our decision to enter Canada should add $4 to $5 to the value of each share of our stock today, value that seems to me underappreciated in the current environment.

It's clear to us that one reason for this is the pattern of income and loss resulting from our method of entering the market, by the way, the only method of entering the market that would make any economic sense to us. We've already disclosed that we expect dilution of up to $0.20 per share this year from this activity. Next year, as we ramp up construction and startup activity, including dark store costs and annualize our occupancy costs, this dilution would grow perhaps into the range of $0.45 to $0.50 per share.

In 2013 as we begin to open wave after wave of new stores, profit from operations will begin to mitigate the effect of startup costs and will turn the corner to profitability perhaps in the fourth quarter that year. From there, we expect to enjoy sharp annual increases in profits such that the EPS accretion in 2014 and 2015 will likely approximate the combined startup dilution from 2011, '12 and '13. 2014 and 2015, EPS will approximate the combined dilution from 2011, '12 and '13. By 2017, we expect to have 150 or more Target stores in Canada with average annual sales of about $40 million or so, driven by the performance of the nucleus of the top 100 former Zellers stores averaging more like $45 million a unit.

We continue to believe that our margin structure in Canada will produce EBITDA margins in the range of 12% of sales by the fifth year of store operations. To us, these overall performance metrics feel real and feel achievable.

Now let's explore how this performance in Canada together with our U.S. growth expectations is designed to work as an integrated strategy to produce $100 billion or more of sales and $8 or more in earnings per share by 2016 or 2017.

On a purely administrative note, my visuals and presentations key off of 2017, yet you should recognize that we strive to achieve these milestones even sooner. In the U.S., we achieved $66 billion in sales last year. Compared with the $51 billion we achieved 5 years earlier, we've enjoyed a compound annual growth rate in this metric of a little over 5% during this period. Between now and 2017, we expect to enjoy a similar growth rate in our U.S. sales driven by same-store sales of 3% per year or more, and also by the additional contribution of new stores, including City Target, of an additional 2% or more per year. Combined, these effects should drive us to sales of $94 billion or more during this timeframe in the U.S.

Combined with the $6 billion or more from our Canadian segment, we expect our total sales in North America to meet or exceed $100 billion by 2017, an achievement that we don't believe requires heroic or stretched assumptions.

Now let's explore the translation of this sales performance to the bottom line. Over the past 5 years, we grew our earnings per share from $2.71 to $4 last year, representing a compound annual growth rate of a little over 8%. In the next 7 years, we believe our U.S. Retail and Credit Card businesses will drive an average annual EPS growth of about 8.8% a year or more. If achieved, this growth would produce $7.20 plus in EPS by 2017.

Now let's discuss the building blocks of this EPS growth expectation. First, as you recall, we expect to grow our sales in the U.S. on average by 5% a year or more, consisting of 3% plus in same-store sales and 2% plus in contribution to growth from that new stores. We believe this sales growth will translate directly to growth in EBITDA because the factors which worked to reduce EBITDA margin rate are about evenly balanced with the factors that offer the opportunity to enhance this margin rate.

On the negative side, the sale of our credit card assets will put modest pressure on this combined U.S. metric while in the opportunity side, we believe a host of scale-related benefits will allow us to offset this modest amount through expense leverage and through other means. The reinvestment of capital to support this growth and to keep our existing assets fresh will create a rate of growth in depreciation that is much lower than the expected 5% plus growth in sales. Over the next several years, this will cause depreciation and amortization expense as a percent of sales to improve by about 50 basis points, such that a steady EBITDA margin rate would flow through to about a 50 basis point enhancement in EBIT margin rate.

Finally, and of huge overall importance to the generation of future earnings growth, we expect to continue to generate billions of dollars of free cash flow per year, cash that could and should be returned to shareholders. And we intend to do just that so long as our share price continues to lag our view of the value we can generate internally.

Conservatively, we think this will allow us to retire between 3% and 4% of our outstanding shares per year while continuing to pay a very strong dividend, and a topic I'll address in a moment. If this doesn't sound conservative enough, consider that we've already retired about 4% of our share count year-to-date through only 6 months of 2011. The single biggest risk to this assumption is the risk of a share price that rises too fast to make this math work over the long term, a risk that I will be personally delighted to address with you in the future presentation if that becomes necessary.

In light of the likely share count in 2017, the Canadian segment performance I reviewed a few moments ago will drive about $0.80 of Target Corporation EPS that year. In total, this is the way that we plan to produce $8 or more of EPS during this timeframe, with $7.20 plus or about 90% from the U.S. and $0.80 plus from Canada. If achieved by 2017, this would represent an EPS growth rate of between 10% and 11% per year. Obviously, if achieved sooner, then of course the cumulative average growth rate would be higher than this range.

Finally, in this section, let's discuss what this means for dividends over this time period. Over the past 5 years, we've grown our dividend at a much faster pace than EPS because we've evolved the generating far more free cash flow today than in the past. Dividends have a special role at Target by the way. After all this year, we're celebrating our 40th consecutive year of annual increases in the dividend. If we do achieve the plan we've outlined to produced $8 of EPS over the next several years, we believe it's likely that we would continue to increase the dividend at a pace well in advance, well in excess of our EPS growth, driving toward an annual dividend of $3 a share or more by 2017.

Finally, as most of you know, I always close presentations of this kind with some form of shareholder value report card. Here, we're looking at what you're account would look like actually yesterday, not today, unfortunately. If you'd invested $100 in any one of our 15 benchmark retailers or in the S&P 500 exactly 5 years ago, over this period, the index has made a grand round-trip back to its starting point, and only 6 of this group of our retailers have outperformed the index. Curiously, Target is the only one of those 6 with any meaningful Apparel and Home content. We fervently believe that we have the strategies in place to remain on the left or on the far left of charts like this for many, many years to come.

That concludes our prepared remarks. And now, we'll move to a question-and-answer period, in which Gregg, Michael, Kathy and I will be happy to answer questions from the audience here in New York. If you have a question, please raise your hand and a member of our team will come to you with a wireless mic to ensure that everyone can hear your question. And as a courtesy, before you ask your question, please provide your name and the name of your firm.

As a reminder, this meeting is being webcast live, and will be archived on our website. And now, we're ready for the first question.

Question-and-Answer Session

Priya Ohri-Gupta

Priya Ohri-Gupta from Barclays Capital. Just wondering if you could elaborate on how your credit ratings are expected to evolve over the time period through 2017.

Douglas Scovanner

The plans that we have just outlined are expressly designed to be credit ratings-neutral. In other words, the share repurchase capital, the dividends, the reinvestment of capital, everything should produce -- is designed to produce credit metrics that would essentially maintain our current strong investment-grade credit ratings. Long-term ratings of course, from all 3 agencies who rate our debt are in the A category and from 2 of those 3 agencies that we have #1 ratings on our commercial paper today.

David Strasser - Janney Montgomery Scott LLC

David Strasser, Janney Montgomery Scott. When you look at the flat operating margin x the D&A that you looked at for the -- through 2017, if you're going to see -- if you had thought -- if there was the risk of divergence up or down, do you think it would be more on the gross margin or SG&A side? Or I guess, the question, which is do you think has more volatility to it or more variability?

Douglas Scovanner

Well, our core plans, of course, envision some degradation in gross margin rate and some improvement in SG&A rate to be able to balance at that level. I think, that over this timeframe, gross margin rate is probably a bit of a more difficult variable to address, to control, to predict than SG&A rate. Gregg, would you agree with that?

Gregg Steinhafel

I think, that's reasonable. I mean, in any given year, you know our gross margin rate is going to be volatile from season to season and year to year based on the economic environment, inventory levels, how good we select the content and a lot of variables.

David Strasser - Janney Montgomery Scott LLC

Do you think there's more risk on upside or downside [indiscernible]?

Gregg Steinhafel

I don't think, we really are making a call in terms of upside or downside. I think, we're going to see some better years and some softer years. So I really don't think, it's a matter of trying to predict up or down.

Greg Melich - ISI Group Inc.

Greg Melich with ISI. If you think about that 2017 figure, that 3% same-store sales growth figure, that you talked about, how much of that is traffic and ticket and how important is growing your online presence and Internet as part of that growth going forward? I mean, will that be 10% of your sales by 2017 if you do it right? Or how should we think about that?

Gregg Steinhafel

No, we don't envision the online. I mean, we expect the online vision, the Online business once we launch the new platform to grow at or better than whatever the online market is growing at. Currently, it is approximately 15%. Today, it represents a couple of percent of our business. So it will be growing fast, but even at that kind of growth rate, it's not going to get up to that 10% level. We really can't -- the outlook in terms of what the traffic and the ticket looks like is pretty cloudy. But I think, we've demonstrated the ability to do both over time. We can generate, and our goal is to generate consistently more traffic in our stores on an ongoing basis and grow the ticket. Sometimes, it's a little bit because we get more on a price per item. Other times, like we've been in this mode is expanding PFresh, where we're getting a lot more units through our lower average retail, and so we're seeing some compression there. But over time, we believe that we're going to be able to successfully grow both the basket and transactions.

Douglas Scovanner

Back to the web-based sales question, from my standpoint, it's important to recognize that over time, the lines of distinction will become increasingly blurred, especially as we execute additional elements of our integrated strategies. So if a guest is in our store, loves the style of a particular patio set and we either don't carry in-store some individuals SKUs, that she'd like to buy or perhaps we're not in stock on some of the SKUs, if we bring the transaction up in the store for in-home delivery, executed through target.com, is that .com sale or is that a store-based sale? To me, I really don't care. It's a sale. It's a profitable sale. And it's why we report web-based sales integrated with our store-based sales in 1 business segment.

Mark Wiltamuth - Morgan Stanley

Mark Wiltamuth from Morgan Stanley over here. If you can help us out a little bit on the free cash flow calculations, when does your CapEx really start to normalize? You got about $1 billion of PFresh remodel in the current number. When does that really normalize and how does the Canada CapEx spending normalize over time?

Douglas Scovanner

Aggregate CapEx due to all elements, U.S. and Canada combined, will be elevated this year and next relative to our expectations in 2013, '14, '15 and beyond. Taking some of the individual elements, we expect our elevated reinvestment in-store remodels to remain quite high by historical standards, through 2012 and '13 as we complete the remodels, including the PFresh concept that we began a couple of years ago. The bulk of our Canadian CapEx, associated with renovating and reopening the current Zellers stores that we select will be laid out over that timeframe as well. We expect to be very active in share repurchase throughout that period, but especially so, as we turn the corner 2013, '14 and beyond, with simultaneous reduction in domestic U.S. remodel capital and reduction in annualized Canadian outlays. Having said that, I would expect that our new store capital in the U.S. and our distribution supply chain capital in the U.S. will increase offsetting some of those decreases that I outlined.

Craig Johnson - Mirage Research

Craig Johnson, Customer Growth Partners. Could you talk a little bit about some of the success metrics you've established through REDcard, not just in terms of sales, but in terms of share of wallet, customer profitability, both for those customers before and after and for REDcard holders versus non-REDcard holders?

Douglas Scovanner

Well, there's a bit of a chicken and egg involved here, because if we isolate REDcard guests who routinely use REDcards, they are a subset of our best guests in the store. Yet it's very clear to us that it's hard to tell precisely whether the best guest was attracted to the REDcard, because of the loyalty element or whether the loyalty element associated with the REDcard helped to convert them into our best guest. Either way, sharply higher shopping frequency, slightly higher average ticket adjusted for income, not so much of a difference in ticket. But again that's a reflection of the relatively high incomes of those holders. We found, based on our early experience, which is consistent with our current experience, that converting 1 of our better and best guests from using some other form of payment to using a REDcard typically increases the frequency of visit to our stores at the household level by range 40% to 50%. And that seems to be a sustaining quality as well. So we aren't seeing any degradation even in Kansas City, which, by definition, will always be 1 year more mature in this process than the rest of the country. So net-net, it is a wonderful retail segment loyalty program, debit and credit cards combined, that also is producing some fascinating metrics in our credit card operation as well.

Gregg Steinhafel

And even the existing REDcardholders once we converted to 5%, their spend and frequency increased as well, not to the extent of 40% or 50%, but we're seeing a 10% lift from those already loyal guests as well.

Todd Duvick - BofA Merrill Lynch

Todd Duvick, Bank of America Merrill Lynch. I had a question for you on your funding strategy over the next couple of years, really. You've got a lot of cash that you're generating, but you also have a lot of cash uses. You've got another $900 million payment coming due for the Canadian leases, and so I guess, my question is would you look to fund that in the short-term market with commercial paper? Would you look at that -- the debt capital markets? And then, I guess, broadly speaking, as you have debt maturities coming due, do you just look to refinance those in general?

Douglas Scovanner

A lot of elements in that picture. One of them that you did not mention is the effect on that picture of our intended sale of Credit Card accounts receivable. At quarter end we had $6.2 billion of Credit Card receivables gross of allowance that is and a sale would hypothetically generate proceeds, pretax and after-tax proceeds in that range. Certainly, half of that or more would go to immediately pay down financings that are in effect secured by those Credit Card receivables. But it would free up several billion dollars for some combination of credit ratings neutral, share repurchase and provide immediate liquidity with what's left. So with that in mind, assuming we achieved a credit card transaction later this year or early next year, it greatly relieves of the need to do any kind of refinances. Absent the Credit Card sale, generally speaking, we would intend to refinance debt as it comes due and very specifically, we would strive to maintain some balance in our credit metrics all along the way.

Margaret Gilliam

Maggie Gilliam, Gilliam & Co. I have a couple of questions -- related questions on your entry into Canada. Can you talk about how the preopening expenses will -- what will be the pattern and whether you're going to take a shotgun approach to the country, or you'll be going into markets with clusters, individual markets. And also will the .com be rolled out at a similar time? And finally, do your sales projections include the GST?

Gregg Steinhafel

I don't know about then GST, I'll let you answer that. But we don't subscribe to the shotgun approach in terms of our entry strategies. So we're going to look to enter the Canadian market in clusters. So we will launch in March of 2013 and we'll primarily focus on the Toronto Metropolitan area. And then in all likelihood as the waves of new stores open throughout the year, and currently, we envision 5 different cycles of new store openings, we haven't totally defined exactly what dates or what months, but envision 5 separate dates throughout the balance of the year. We will, in all likelihood, move West secondly, and then lastly, come back to the East. But we're looking to gain density and scale and distribution, supply chain, marketing team, efficiencies within trade areas in each of those opening cycles. And so if we're going to be opening between 125, 135 stores over probably a 6 cycle because that will take us 5 cycles through 2013, we will probably need another cycle in 2014, possibly a second cycle in 2014 to complete all of those. We will very logically roll those out to make sure that we're able to do so in a very efficient manner. We haven't made the determination whether .com is going to be available and robust, and they're on day 1, cycle 1. So there's a handful of initiatives and things that we would like to do, but we're not going to have the capacity to do. So .com is one of many other investments that we know that we're going to make over time. We're identifying what all of those are, the costs, the opportunities and we're going to develop a sequencing plan to make sure that we ultimately have it there, but we haven't made that determination right now. So we'll share that with you when we have greater definition on that.

Douglas Scovanner

And the sales projections that we just shared with you today, to clarify, do not include sales related taxes GST in Canada just as our sales in the U.S. do not report with sales and used [ph] taxes.

Deborah Weinswig - Citigroup Inc

Deborah Weinswig from Citigroup. So we're looking out longer term, can we talk about the store-based potential in both the U.S. and Canada? And then also as the REDcard continues to ramp up, I think, we're at 8.7% at the end of second quarter. Can you talk about your customer analytics potential?

Gregg Steinhafel

Well, we think there's hundreds and hundreds of available sites left in the United States. When we did the projections over the last couple of years, the potential sites for Target stores with existing format approximate the 3,000 number. Now whether or not we are going to be able to bring those sites through the process in an economically sound manner where we're able to generate the right kind of return or we're going to get cities to embrace these kinds of projects is still to be seen. But there are still -- there's ample opportunities to densify our Target stores throughout the U.S. in the current format. Like I said earlier, we believe there's hundreds of sites for City Target. We're going to crawl, walk, run with that. We've got 5 stores next year. We really want to prove out the test case. We think it's going to be a great success, because these are guests that love Target. They have a great affinity for Target. They just can't reach Target. So we think that the there's going to be a lot of excitement around bringing a smaller Target experience into these dense urban areas. But like any new concept, I'm sure we're going to make some mistakes out of the blocks. We're going to have to customize the merchandising mix and what have we added, what's in, what's out. A lot of the sales floor on the first 5 are half the size of a current Target today. So today, we have, on average, about 83,000 square feet, some of these are in the high 40s. So we've got a lot of work to do to determine exactly by trade area, what assortment is going to be in and out. So we're try and to create some flexibility. We know this is R&D investment as well and we'll have to come back into some of these stores and tweak them over time. But we really believe that we'll figure out how to provide the right experience, provide the right content and the right profit mechanism. These will have to have a pricing premium because the investment costs and the operating costs in stores are far greater than a typical suburban store. So there will be a pricing premium associated with that. We always strive to be highly competitive, so we want to be 10% under the local competitors. But we want to be able to maximize the profit as well. So there'll be a lot of variability in the profit model. It will require its own marketing circular. It's got its own banner. So there's a lot of variables there, but we're very bullish on that, too. So in total, we believe that, 3,000, 3,000-plus locations over a long period of time.

Douglas Scovanner

On the question about REDcard penetration, the percentage of our sales, where a Target Debit Card or Target Credit Card are used as a form of payment, you're, of course, with your numbers, and the quarter just ended between 8% and 9% of our sales were made with 1 of those 2 forms of payment. That's obviously, a quarterly average. We're already beyond 9% as the chain begins to evolve. I mentioned Kansas City earlier. We're nearing the first anniversary of the national rollout, nearing the second anniversary of the rollout in Kansas City. Kansas City has added 300-plus basis points of penetration in its second year of operations, and therefore, we're running 9 plus today, nationally. I would expect to be running 12-plus nationally at this point next year. How far we might go over time is a matter of conjecture, of speculation. I certainly don't see any reason why the combined debit and credit penetration of the REDcards would settle out before exceeding 20%, whether it well exceeds 20% or not. Who knows?

Gregg Steinhafel

And just lastly, absolutely, we're going to data mine to the extent we can, and we do that currently today with our REDcard. We do that currently with our in-store Aleta [ph]. We clearly recognize that mobile customized personalized offers are really, really important in the future. And we're gaining an experience, and we're getting better and better at that. And we'll continue to aggressively pursue that.

Adrianne Shapira - Goldman Sachs Group Inc.

Adrianne Shapira, Goldman Sachs. Doug, you had mentioned that you're expecting 2014 and 2015 to see accretion from the combined dilution of '11, '12 and '13. So far it sounds as if we know about $0.70. Could you help us think about what that aggregate dilution should be, and then how we should be thinking about the pacing of the accretion?

Douglas Scovanner

Well, we're not prepared to make a precise forecast of 2013 at this time. I did say in the stylized chart we shared was consistent with the comment that we certainly expect the annual dilution in 2013 to be less than 2012. How much less, candidly, we don't even know. All of the variables at this point, we haven't even selected the second wave of leases after all. But certainly, if you take the high end of the 2 years that we have disclosed forecast, the high end of $0.20 this year and the high end of $0.50 that I talked about in my remarks, add something else to it, it certainly -- if we're not worried about some kind of false sense of precision, it certainly gets into the range of $1 pretty easily. And so we're thinking about something in that range in 2014, '15 combined, growing to $0.80 plus per year by 2017. And you can drop a proper curved line between 2013 and 2017 to see what the individual data points look like in our thinking between those 2 dates.

Neil Currie - Dahlman Rose & Company, LLC

Neil Currie, Dahlman Rose. One of the attractions of the Canada deal, of course, is being able to reach a critical mass of stores quite quickly, and by 2014 or so, you're going to have that critical mass. So I'm wondering about the next step. In the next 5 -- in your 5-year plan, do you envisage any point, either breaking ground or being close to entering any of the international markets beyond Canada?

Gregg Steinhafel

We have a plate that is full of great strategic initiatives designed to generate lots of shareholder value over time. Our focus is only on the initiatives that we have described today. We will continue to be aware and astute on a global basis, what is happening in the retail market. But we have no plans, at this point in time, to do anything other than what we've talked about today.

Robert Drbul - Barclays Capital

Doug, over here on the left side. Two questions, the first one is in the $7 and -- Bob Drbul, Barclays Capital, the 720 number, does that assume the sale of credit in that number?

Douglas Scovanner

It presumes -- yes, it presumes that toward the beginning of the multiyear period that we sell the credit card assets. It presumes, therefore, that we end up continuing to enjoy a portion of the credit card profitability, measured in dollars that we enjoy today. But not all of it.

Robert Drbul - Barclays Capital

And then the second question I have is the City Target format will the returns of the City Target format be comparable, slightly worse or better than your sort of overall...

Gregg Steinhafel

It's always our goal to be comparable or better in every one of these initiatives. So we believe that over time, we're going to achieve our normalized return goals in these stores. Now we're going to stretch ourselves to do better, we think. Actually, there's some upside there, but we're not willing to put that into the formula, because there's too many unknown variables that we have to work through and pricing studies that we have to do to make sure that we have the right level of competitiveness, yet optimizing the price wherever we can.

Douglas Scovanner

I really want to underscore Gregg's point. We're not projecting growth in store count for the sake of growth in a very literal sense. Ideas to reinvest new capital in growing our chain compete head on with the notion of the value to be created by retiring shares with that same dollar of capital, and we're very sensitive to striking that balance, very sensitive therefore to not investing capital with diminishing returns because it ends up creating a double barrel kind of problem. We end up with a lower profit growth and a higher denominator of share count in the process by virtue of the direct impact on share repurchase of hypothetically investing more capital and longer-term projects.

Bernard Sosnick - Gilford Securities Inc.

Bernie Sosnick, Gilford Securities. Did you say that online sales equal $1.2 billion at present?

Gregg Steinhafel

No, I said it represents a couple of percentages. But we haven' spent specific in terms of what exactly that means, so...

Douglas Scovanner

Online sales directly measured without the indirect impact that I gave an example of earlier lie between 1% and 2% of Target's aggregate sales in 2010.

Gregg Steinhafel

But the web, we also try and calculate what we call web-influenced sales like what Doug was trying to describe earlier. So much research, there's so much activity around the web and mobile technologies prior to an in-store purchase that if you look at the web-influenced portion, it's a large portion of most retailers' sales, including ours as well. It's billions and billions of our sales. You can connect to somebody having gone on our website and searched and done some kind of research on that item.

Bernard Sosnick - Gilford Securities Inc.

Secondly on the REDcard, could you give us an idea of what the top quartile of best REDcard shoppers spends, say, in a quarter at your stores?

Douglas Scovanner

Top quartile of REDcard holders -- and this is a pretty rarefied group, so please bear that in mind, would be spending $3,000 a year or more in our stores.

Bernard Sosnick - Gilford Securities Inc.

I'm sorry, 2...

Douglas Scovanner

$3,000 per year or more in our stores and online.

Robert Ohmes - BofA Merrill Lynch

Robby Ohmes, Bank of America Merrill Lynch. Doug, you gave us, I think, the D&A, you said that the D&A portion of U.S. by 2017 should be down about 50 basis points. Could you walk us through or give us some guidance on what the 2017 U.S. gross margin SG&A trade off could look like, especially, I think an answer to Deb's question about REDcard. Could it someday be over 20% of sales, and maybe some framework on how we should we modeling gross margin? Could it be hundreds of basis points lower by 2017 than it is today?

Douglas Scovanner

I think, that the most likely answered to that question is that gross margin rate will highly likely be down more than 100 basis points not very highly likely down more than 200 basis points in that time period. Obviously, it's highly sales-dependent. If the REDcard takes off and we blast through these sales projections, gross margin rate might be down more than 200 basis points because of the markdown impact. By the way, I think, we'd be talking $125 billion, not $100 billion, and $15 or $20 a share not $8 in the process. But in the unhappy case on the gross margin line, there may be some interesting side effects, elsewhere.

Robert Ohmes - BofA Merrill Lynch

It could be 200 on SG&A...

Douglas Scovanner

Oh no, no. I think, that EBITDA margins are likely to remain flat. Some of the same things that drive gross margin rate down have an SG&A benefit. I think, we'll be able, over this timeframe, to fully offset gross margin rate deterioration with SG&A rate favorability.

Jack Balos - Midwood Research

Jack Balos, Focus Research. Last Friday, I was at your Target store in Valley Stream Shopping Center, where they also have a Macy's, a JCPenney, a Sears, a Kohls and a Wal-Mart, and BJ's. And first of all, I would say that I would hope that you add that store to your remodel list. That really needs it desperately.

Douglas Scovanner

You guessed in this part of the country, a little harder on our assets than some other parts of the country, but ...

Gregg Steinhafel

And Valley Stream is currently a 2012 PFresh remodel project. I don't know what cycle it is in 2012, but I do know that it is currently being planned for 2012.

Jack Balos - Midwood Research

Now in that store, I saw the new Levi's pants. They look very nice. But the one thing I found there was I don't know if this is true throughout the chain and that is those particular tables, they don't have any price tags on them. So I went to an employee who said she has to use the bar code and then you can get the price tag and see what the price is. So we went to a bar code place, it didn't work. She went to the registers and that worked. But there were no price tags on an entire table of that. So I don't know if that's just anomaly or whether you're trying to save money.

Gregg Steinhafel

Kathy, I don't know. You want...

Kathryn Tesija

In general, as you know, all of our apparel is ticketed, occasionally. We have some table programs that are not and there's a sign on the table, which says the price. I do think, that the denim brand was intended to be ticketed and priced and so I'll have to check into that. I don't know whether or not.

Douglas Scovanner

Did we have your size?

Jack Balos - Midwood Research

Excuse me?

Douglas Scovanner

Honestly, did we have your size?

Jack Balos - Midwood Research

Last thing is that when are you going to start catering to the baby-boomer generation? One of things that was missing for me was button-down men's shirt, which Wal-Mart has extensively, which you have practically nothing. You don't even have khaki pants. When are you going to start catering to the more affluent baby-boomer generation?

Gregg Steinhafel

Kathy, button down?

Kathryn Tesija

Let me tell you, in general, that's definitely a place that we're headed and we own a brand, which I talked about, it's a $2 billion brand or just under $2 billion for us right now. And that's really the sweet spot for what I would call empty-nesters, baby-boom generation. And we are expanding that brand and you will see in Men's much more classic styling, fit and expansion there.

Gregg Steinhafel

I would just add even though the standard Target store has 130,000 square feet, the choices -- the difficult choices that we have to make by category and by item and what businesses are we in and where we're going to take a stand. And it's always been our desire to make sure that we support the core within our merchandising businesses. So we stand for women's apparel. We stand for kids. We stand for young families and we start by making sure that we have adequate critical mass in those businesses that are core and absolutely a requirement to make our total experience best in the business. So we don't subscribe to a little bit of everything across the litany of businesses. We say “we want to dominate here, we want to dominate here, we want to dominate here.” We overinvest in those business consciously, which means we have to under-invest in other places of the stores. So whether it's a button-down shirt example, you'll find other examples in the store where you might see -- where we see -- we might be a little thin compared to Wal-Mart. Oftentimes that's a conscious decision on our part to tap away from Wal-Mart because of -- they're very dominant in some business. We want to be more dominant in other business and it's part of our overall strategy to differentiate, particularly in Apparel and Home categories where you can differentiate.

Mark Miller - William Blair & Company L.L.C.

Gregg, Mark Miller with William Blair. Looking forward to the relaunch of your website. It looks like there's going to be some great new functionality for consumers. As you've done a lot of research in anticipation of that, what are your customers telling you about the importance of free shipping? And since that's basically a form of price, how does Target evolve related to those interests? And then as well on third parties, how much traction are you getting from third-party product on the site and how do you think that evolves over time?

Gregg Steinhafel

Well, I'll address the free shipping. I don't know -- Michael or Kathy want to talk about the third-party partnerships. Free shipping has evolved from something relatively insignificant to now it is almost a -- it's a standard part of your offering. And we offer free shipping on many of the items that we sell on .com. And we're continuing to look at, how do we make our .com offering more relevant and more competitive? Free shipping is one of those expensive but necessary kinds of things that we know over time, we're going to have to expand. And so we're looking at how to do that right now, and I think, that over time, you're going to see us expand the number of items we have on the site that we're going to be offering free shipping on.

Kathryn Tesija

I will tell you just a little more on free shipping. I think, we're about 900,000 items that are now on free ship. I don't know the exact number, so rough -- it's a lot, basically of the items on our site. So Gregg's right, we're definitely moving in that direction. And in terms of sales on our site, predominantly, they come from Target items not marketplace items or other sellers. And we feel we've got a ton of growth potential within our own brands and just getting that site functionality, where we want it to be, making it feel like a Target store, adding all of the social elements which are very important to our guests, and then really the multichannel shopping back and forth. You can view it in a Target store and find extra colors online. You can research it online, find the item you want and go to a Target store and buy it, and then expand that assortment of our current brands, our own brands on our website. That's where our focus is today. But, of course, this marketplace is changing at the speed of light, and I'm now sure we'll have something new to tell you every quarter as we move forward.

Mark Miller - William Blair & Company L.L.C.

[indiscernible] here. I know you had lowered the SKU count across the store from, I think, high 70s to low 70s. I guess, looking back on that, how do you feel that, that reduction may have impacted your sales over the last year and where do you intend to go with that, going forward?

Kathryn Tesija

Yes. Actually, it's about mid, 80 maybe 85,000 to about 83,000. So relatively small change from our viewpoint. And really, it was more about optimizing the SKUs that we carry and how our stores function, making sure that we had enough space on the stores on the floor for our best-selling SKUs and keeping the stores productive as possible. So I actually, think, it has enhanced our sales. We've done a lot of tests in preparation for City Target, where our SKU count will be cut pretty dramatically, and working on getting product to fit on the sales floor and not be in the back room. And as we've adjusted that and done a number of tests, our sales actually improved, given the in-stocks throughout a given day on the sales floor. So I think, the SKU count was really clarifying our offering, making sure that we made it easier for the guests in terms of presentation to walk through each individual category, and I think, it's probably helped our sales.

Douglas Scovanner

There's a tremendous amount of science that stands behind the comments that Kathy just made and some of the impacts are counterintuitive within a category. It is generally, not the best idea to simply begin reducing SKUs by reducing the lowest sales velocity items because of the differential substitution impact of 1 item versus another item, and often makes sense to delete items that may be third, fourth or fifth from the bottom, not at the bottom of sales velocity.

Gregg Steinhafel

The other thing I would add is our SKU count had drifted upward over a series of. This wasn't just a unilateral decision to say, hey, it's time to cut our SKUs. Our SKUs had migrated up from the mid-70s up into the mid-80s and over time -- now some of that was very conscientious on our part. You have greater SKU density when you expand into food. As you customize your assortment by stores, you're going to add more SKUs there. Certain businesses just are more SKU-intensive than other businesses. So some of the SKU increases that we had were intentional and very planned. But over time it's like anything, you have to be disciplined and we have to make sure that we're just not adding to add and add and add, because there's so much cost involved with every vendor and every SKU that comes through our business. And we want to make sure that there is a reason for it, because one of the things that we think we do well as merchants is to provide the breadth of choice, but we like to believe that we're super editors, that we really deliver the best choice by category and the right number of choices within category and that there is logic as you shop our store, because our guests are -- they have $40-$50 to spend and they have 30 minutes. And sometimes too many SKUs can be overwhelming and paralyzing, because there isn't a clear choice between all of the choice you got in the shelf. The other -- on the other hand, they want to have a certain amount of choice to be able to make good trade-off decisions and we spend a lot of time trying to find and determine, where is the sweet spot in every business that we operate? And it's not the same from food to toys to apparel. So we put a lot of intuition and a lot of science in each of these businesses that we operate to try to find the optimal assortment, so that we can provide the right solution, but keep the shopping experience simple and fast within our stores. Then the whole supply chain and the operational side of it is another element that we're conscientious, too, because we want to make sure that we're productive and we're able to be in stock and deliver the experience that we're trying to deliver as well. So it's very complicated, but we're not vacillating back and forth. We're making small adjustments. We try it in certain businesses, we test out the case, then we apply it more broadly in those businesses. And that's just part of the ongoing efforts that our merchants go through to deliver the right kind of assortments.

Wayne Hood - BMO Capital Markets U.S.

Wayne Hood with BMO. I have 2 questions to your Canadian business. One was on the food side and the other is on the pharmacy side. So on the food side, Gregg, one could argue that if you go into that market without food given the wide space that you have in other areas and the competitive environment. You don't have a lot of square footage to it, third-party distribution and so on. You could make that argument. So I'm wondering how do you make yourself relevant in that market with limited space, pricing gets no frills around food, thought process around that and where that footprint might lie. And then on the pharmacy side, where no stores go dark, how are you going to maintain those files to make sure Wal-Mart doesn't get them, those pharmacies and so on, so you keep the traffic coming after you reopen.

Gregg Steinhafel

I'll take your second question first. We aren't going to maintain those files. Those files will go dark and when we reopen the stores we will be -- we will basically be starting as a new store. So those pharmacy files will migrate to other competitors.

Douglas Scovanner

It will be a process of monetization.

Gregg Steinhafel

In the marketplace. As it relates to the food footprint, that will be a very site-specific decision on our part. So I think, you will -- ultimately where we will end is there will be some stores where our food footprint is very small and it will be in dense urban areas, where there's lots of grocery competition, and we don't really need food to drive the traffic, because there's a lot of inherent traffic in that particular site. In those cases, we're going to bias more to make sure that we're offering a broader assortment of apparel and home products and other things throughout the stores. In other sites, where we're going to need food to be more of a draw and a traffic generator for the site, it will have a larger footprint. In total, the footprint will be smaller, both in an absolute sense and slightly smaller on a relative share of store basis in Canada.

Wayne Hood - BMO Capital Markets U.S.

What will your pricing be against Wal-Mart, or no-frills type of [indiscernible]?

Gregg Steinhafel

Well, currently, we haven't made that decision. But if we do what we do here in the United States, where we have Wal-Mart in our trade areas, we key off of Wal-Mart. Where we don't have a Wal-Mart in a trade area, we key off of the best, most competitive comparable grocer or competitor within that trade area. And in all likelihood, we'll take that same kind of approach in Canada.

Unknown Analyst -

Andy Steiner [ph] from Louis Corporation. You had made a reference earlier to the Montgomery Ward stores about a decade ago, when you've taken them over and the fact that they retired the new [ph] locations. Could you elaborate a little bit on that with respect to the sales per square foot lift that you roughly saw back then and how you're kind of thinking about that in terms Canada now as far as the plans you've kind of detailed here today?

Douglas Scovanner

I think, the analogy is sound up to a point and then breaks down beyond the point and I'll try to describe what I mean by that. But today, in the 30 plus former Montgomery Ward stores that are in our chain, we're experiencing average sales 5x or 6x what Ward's last known sales were in those respective buildings. We ended up getting a minority of Ward's stores from its bankruptcy estate, but we paid the majority of what was ultimately paid for all of Ward's real estate. In other words, we cherry-picked, if you will, and paid up to get the best sites and left the rest behind in that process. They are wonderful buildings. In some cases, we're now going through our first remodels having thoroughly renovated the buildings before reopened. But of course, every one of these stories is a site-specific story, even among those 30 Ward stores, there's a significant range of annual sales volumes, and as you'd expect, given the nature of the respective trade areas around the stores. Likewise in Canada, we're doing a very customized site-specific trade area analysis that leads to a site-specific sales forecast that we run backward through an investment model to figure out what the lease dynamics need to be for us to make economic sense out of the site. And that's only on the surface. One layer underneath, if we've already selected 1 particular store site, and Zellers has another 1, only a couple of miles away, we calculate the marginal economics, not the absolute economics of that next site and look at what other retailers might be interested in buying it, get into a discussion with the landlord about whether the landlord would like to have the site back and make some kind of economic accommodation to us as part of the package or site-specific. And so there's a heck of a lot that goes into each individual site, separately. Many of these leases represent leases where we'll be the seventh, eighth or ninth tenant in a building and the original lease might have been written in the 1950s or 1960s with some language that made a lot of sense then but takes some care in interpreting today in terms of the kinds of use restrictions that are in place. So there's a tremendous amount of complexity even on an individual site, let alone at the kind of scale that we're talking about here. It means that the best hundred Zellers sites back to the heart of your question, will end up enjoying sharply higher sales productivity than our average U.S. store, because these aren't average locations. We'll end up enjoying sales productivity that looks like our top quartile in the U.S., because those are top quartile kinds of locations.

Unknown Analyst -

And what does that mean relative to, say on the average Zellers store, what they're doing today?

Douglas Scovanner

Well, Zellers is owned by a private company and doesn't disclose sales statistics at the individual store level. We don't disclose them at the individual store level ourselves as a public company. But certainly, I think that our year 5 sales, chain-wide in Zellers will be some multiple of the last known sales that Zellers is enjoying today. Whether it's 3x, 5x, or 7x, stay tuned.

Daniel Binder - Jefferies & Company, Inc.

Dan Binder, Jefferies. I had 2 questions, a merchandising question and a financial question. On the merchandising side, you're obviously evolving the store, one of the things you've done and talked about today is shrinking the size of media, prerecorded media, books, movies, CDs, it still takes up a fair amount of space in the store. I'm just curious over time as that continues to move online to unavailable -- in different ways what you think that space will evolve to. And then my financial question is a simple one for Doug. In your buyback plan what multiple are you assuming forward earnings throughout the years?

Gregg Steinhafel

Music, movies and books as a category that we know has been in decline for some time. We've done a couple of things. Number one, the location of the department now is positioned in a way that we can expand businesses that we believe over the next decade, our businesses we want to expand. And so where it's located, first of all, positions us with greater flexibility versus if it was isolated on the inside of the racetrack. We have it on the racetrack and in over the last couple of decades, we've always had more space constraints on the perimeter than we had on the inside. It is -- it represents today even in the declining state that it's in, some of the highest sales and profit per foot of any business that we have in the entire store, because we've taken a very methodical way to downsize this business over time. And so we've been editing out the space and it's probably half the size that it was at its peak. So we've maintained the best of the best. We've maintained great operating margins. We've taken a greater share of a declining business, and from a profit, from a sales and a profit per foot basis, it absolutely deserves every linear foot of space that it has today. Over time, it will continue to decline and as it does, we'll reinvest that space into other areas of the store. This is not atypical compared to what we've done in other businesses like Home Improvement, Sporting Goods. Over the years, our Sporting Goods department was 1/3 bigger, our Home Improvement area was twice the size as it was today. We used to be in the Automotive business in a meaningful way. Today, all we have is 4 sides of some convenience care kinds of businesses. So as we design the store, we try and create the flexibility and the capacity, knowing that the guest is going to continue to evolve, our business model is going to continue to evolve. We need to continue to update our stores and reinvest and edit space as the guest changes. And we want to do it in an economical manner in a way that makes sense. And so it's all part of the process that we use when we design and remodel the stores. And one of the best benefits of PFreshing 900 stores is we re-rationalize the entire space throughout the whole building. So you can imagine some stores haven't been remodeled in 10 or 12 years, which means they still have space in those stores that were reflective of how the guests shopped at that particular point in time. We use this process to make sure that we were editing both up and down every category of the stores as PFreshing them to bring all of the space allocations up to what we believe are appropriate for Target over the next 5 years.

Douglas Scovanner

On your question of what multiple we've embedded in our modeling to buy back shares in the model over time, rooted in the spirit of belief that the markets tend to get right over the long-term. We have embedded in the model an assumption that our PE rises up into the 15 to 20 range by 2017 if that assumption sounds aggressive. If we're wrong, if the multiple stays where it is, then all else being equal instead of adding 3 to 4 percentage points per year to EPS growth would add 4 to 6 percentage points to growth by getting far more shares back for the same dollar laid out. So we think that's a reasonable way to put the model assumptions together. And if any of you want to try this at home, please reach out to John, John Hulbert, or myself and we'll walk through the more detailed level if you'd like. The assumptions require to balance against a $7.20 a share. It isn't that that's a precise plan of ours, but that each one of the assumptions built together produces the result. Some of them, obviously, will end up beating, some of them will clearly end up presenting a challenge to be able to meet or exceed.

Charles Grom - Deutsche Bank AG

Chuck Grom with Deutsche Bank. Doug, if you are successful in selling the receivables at the end of the fourth quarter in the beginning of next year, just wondering what your expectation is for the earnings stream from credit to be like in 2012 and beyond relative to what you think you're going to generate this year.

Douglas Scovanner

Well, we can make some reasonable guesses, of course. But until we've finalized a contract negotiation, it's a bit speculative. One thing I can state with very high confidence that I attempted to describe on yesterday's conference call, right now, we have super strong underlying fundamentals in our card operations and all else being equal, in any environment, that's going to flow through in some direct kind of way. In addition, the strength of the changes in risk are causing us, or compelling us, to reduce our accounts receivable allowance at an extreme pace at the moment. And therefore, whether we keep the receivables or sell the receivables, the magnitude of that second impact will be behind us next year. So when we make comments about dilution or accretion, selling the Credit Card assets versus keeping them, it's against an apples-to-apples baseline of what the performance would be if kept. So one needs to, in some fashion, normalize the current bad debt experience to figure out what next year's kept scenario would look like before calculating what's sold. In the scheme of things what's really happening in the case of a sale is the debt capital that we have that stands behind ownership of this asset is priced within rounding distance of what likely costs of those debt capital funds would be at a financial institution, and therefore, nothing gets lost in that shuffle. The equity capital, of course, is a different picture. Different banks have different -- differing regulatory frameworks and will need to devote more capital or less capital to this portfolio than each other and more capital or less capital than the equity capital that we have standing behind it. But ultimately, beyond the negotiating dynamics in a conceptual framework, we're simply replacing our debt capital, a similarly priced debt capital on the other side of the ledger, someone else's debt capital, and ditto on the equity side. And what gets us back into balance because that equity capital, of course, is very expensive on either side of the equation, what gets us close to being back in balance is taking the equity capital of ours that's freed up from a sale and effectively and immediately applying it to share repurchase. We don't need that equity capital anymore if the asset is on someone else's balance sheet. And that's the mechanism that gets us to the point that we believe that there will be very little dilution by the time we're done from a transaction.

Faye Landes - Consumer Edge Research, LLC

Faye Landes of Consumer Edge Research. One clerical question and then 2 bigger ones. First of all, just on the very -- the way that you provided the '17 forecast is very helpful. In some instances, you talked about CAGR. So is the D&A changed? Is that the 1 year, the 0.5, is that every year? Is that 1 year? That's the clerical…

Douglas Scovanner

The 0.5 -- and I appreciate the question, the 0.5 that was depicted on one of my visuals, is intended to be the contribution to EPS CAGR from the differential growth rate and depreciation and amortization relative to sales. So in a different fashion, picking up 50 basis points of enhanced EBIT margin rate by '17 compared to the base period will add on average a 0.5 point per year to EPS growth. It won't be 0.5 point in each year, of course, because the pattern isn't smooth throughout time. Generally speaking, we would expect depreciation and amortization expense in the U.S., that was a U.S. workup by the way, to be relatively flat in the next couple of years and then grow modestly after that. So we'll pick up. This is the happy case, where most of the benefit is frontloaded not back loaded during the time period.

Faye Landes - Consumer Edge Research, LLC

Now the 2 bigger questions -- but I appreciate that, that's very helpful. First of all, the merchandising, marketing presentation is really a lot of fun and I'm sure I'm not...

Douglas Scovanner

So what are you telling Gregg and me about ours?

Faye Landes - Consumer Edge Research, LLC

No, no. And I'm not alone at counting down to September 13. But I'm wondering if you -- when you think about traffic, originally when PFresh got started it was -- you talked a lot about traffic and what it would do for traffic. When you think about traffic, is it possible that we're living in a new normal world, where traffic, whether strip consolidation traffic going online, that's just a baseline for traffic, is different and sort of a leeching of traffic, which clearly, you've been able to offset. But is that some -- do you think about it that way? The second question is on Canada, the picture that you portrayed was a wash, an earnings wash through '17. Is that correct?

Douglas Scovanner

No, let me address that 1 head-on, first, if I may, before I jump off the stage. No, I intended to say that the combined accretion in 2 years only, '14 and '15 would approximate the combined dilution from now until store openings starting '12, '13.

Faye Landes - Consumer Edge Research, LLC

And then afterwards, can you -- I mean how -- when do you think you'll have visibility on '16, which is normally a far, a long time from now. But given that again, we were talking about essentially a wash through '15, because I assume that your...

Douglas Scovanner

Please understand that means that it will be hugely profitable in '14 and '15.

Faye Landes - Consumer Edge Research, LLC

Right. But Terry's [ph] going to follow…

Unknown Analyst -

Can I ask a really dumb question? When we -- we're talking accretion versus dilution, is the accretion on the base of consolidated earnings? Or is it on what the business would have earned without the Canada dilution?

Douglas Scovanner

It's contribution to reported earnings during the period. So if we want to do a pro forma hypothetical, where we took the equity capital that's devoted to Canada and instead devoted it to incremental share repurchase, what you'd find is that Canada will outpace that horserace by depending on your assumptions '16, '17 or '18. In other words in our base assumptions, we believe we're better off in reported EPS terms by somewhere in the '16, '17, '18 timeframe by having invested in Canada as opposed to a more aggressive share repurchase program today with the equity capital that's being tied up in that investment. And obviously beyond '16, '17, '18, those 2 lines pull apart quite significantly. But that's where it crosses over.

Faye Landes - Consumer Edge Research, LLC

So when do you think you'll have visibility of the magnitude -- you'll be able to share visibility on the magnitude of the contribution from Canada in '16 and '17?

Douglas Scovanner

You're only seeing the deer in the headlights look here because that's what we attempted to do but apparently failed. We believe we'll earn $0.80 or more per year annually by 2017. One of the earlier questions dealt with trying to quantify the last missing piece of dilution, roughly speaking there's $1 of dilution across 2011, '12 and '13 combined. So we're saying about $1 between the 2 years of earnings between the 2 years of '14 and '15. Split that any way you'd like, 35-65, 40-60, 50-50, 45-55, try a 45-55, 65-75. It's a curved line.

Faye Landes - Consumer Edge Research, LLC

Back to the traffic. I'm sorry for my confusion, but -- so I apologize for my confusion. But on the traffic, can you just talk about the idea of -- is there -- are we on a new normal situation?

Gregg Steinhafel

I don't know if we're in a permanent new normal. I mean, our goal is to generate top line sales growth, and same-store sales growth is a primary driver of that. And we have tactics and strategies aimed at both sides. I mean, PFresh and 5% Rewards are clearly aimed at traffic generation in the store. Other of our strategies are aimed at growing the basket and growing the ticket. So just like in the past, it will be a combination of both traffic and ticket. Clearly, in certain economic times, there's trip consolidations, there's a lot going on. But I don't think, fundamentally, the Internet and online shopping is going to change the fact that people enjoy shopping in the best-in-class retailers are going to grow and gain share and do it by getting more trips to their stores. We believe we're one of those companies that are compelling enough that we're going to be able to enjoy the benefits of both better traffic and average basket size growing up over time.

Douglas Scovanner

At the risk of getting kicked by the boss, I'll even take a stab at it. Over the 10-year period, '95 to '05 we grew our same-store sales on the compound rate of about 5 percentage points a year. Traffic made up between 1 and 2 points of that comp. And ticket made up between 3 and 4 points. So 1 to 2 was the normal for a fairly long period of time. If we achieve 3% plus moving forward, I think, one of the new normal aspects that needs to be addressed before we even talk about traffic is that if the total's thinner then one of those 2 drivers needs to be thinner. So maybe the new normal is some variation on average over a longer period of time of positive 1 for traffic, with the rest of being made up in ticket. Obviously, there are going to be big, big variations around the theme.

Unknown Analyst -

Gregg, I have -- Don Yirak [ph], more of a straightforward question. We really haven't talked about holiday that much. Given the lessons learned from last year and the fact that both REDcard and PFresh are now material parts of the business, could you speak of what you might be doing differently this holiday or incremental versus last year?

Gregg Steinhafel

Yes, we're going to do a lot differently for this holiday. And as Michael said, we just haven't formalized all of our plans yet. It will just be a little premature to start laying out for you, at this time, what changes we're making to content and marketing and in-store promotions and things like that. But over the next couple of months, as we firm those up, we'll share them with you.

Douglas Scovanner

We promised at the beginning of the meeting to get everyone on their way at 11:30 sharp. And I think that probably means we have time for 1 more question.

Gregg Steinhafel

If not, thank you very much.

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Source: Target Corp. Special Call
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