Target heightening food focus

by Eric Schroeder
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MINNEAPOLIS — In the face of slumping sales and profits, Target Corp. is focusing on strategies centered on building traffic. These strategies include investing in the company’s food distribution capabilities and working to better communicate the value to consumers of shopping for food at Target.

The strategies were discussed over the course of a Feb. 24 conference call with securities analysts after announcing 2008 financial results.

Target net income in the year ended Jan. 31 was $2,214 million, equal to $2.87 per share on the common stock, down 22% from $2,849 million, or $3.37 per share. Sales were $62,884 million, up 2.3%.

In the fourth quarter ended Jan. 31, net income was $609 million, equal to 81c per share, down 41% from $1,028 million, or $1.24 per share, in the same period in 2007. Sales were $198,023 million, down 1.6%.

Announcing the fourth-quarter declines, Gregg Steinhafel, chairman, president and chief executive officer, cited the impact of "unprecedented economic conditions" on the company’s business.

The company’s retail gross margins declined 1.4 percentage points in the fourth quarter, reflecting increased markdowns and the mix impact of "faster sales growth in non-discretionary, lower margin-rate categories."

That shift was the subject of considerable discussion in the conference call and is viewed by Target management as one of the company’s more promising opportunities in the current market environment.

Mr. Steinhafel described a "fundamental change in consumer spending patterns" adversely affecting traffic and sales "particularly in higher margin discretionary categories like seasonal, apparel and home."

Confronting this changing business landscape, Mr. Steinhafel said Target remains committed to making its stores the "preferred shopping destination for our guests" by ensuring Target "remains relevant to our guests."

These objectives translate into a number of planned actions, Mr. Steinhafel said, including "an enhanced focus on frequency driving strategies which are centered on food, pharmacy and commodities."

Turning specifically to food, Mr. Steinhafel said Target will make "significant investments" in support of the company’s perishable food distribution capability.

"We also continue to invest in our food offering in recognition of its importance in driving greater frequency, increasing guest loyalty and making Target a preferred shopping destination," Mr. Steinhafel said. "In recent years we have expanded our selection and assortments to provide improved convenience and outstanding value, and in 2009 we plan to further enhance our assortment of dry, dairy and frozen to add perishable items in new and remodeled general merchandise stores."

Kathee Tesija, executive vice-president of merchandising, said more shelf space will be allocated to non-discretionary categories, including food, in the company’s new and remodeled stores.

In addition to giving more space to food, Ms. Tesija said the company needs to combat misperceptions about Target’s prices.

"We know in today’s economy that guests won’t come to us for their every day necessities if those necessities aren’t priced right," she said. "Our competitive shop process, which has been a consistent element of our strategy for well over a decade, ensures that we are priced within one to two percentage points of Wal-Mart on like or identical items within local markets. However, guests’ perceptions do not reflect this reality. As a result, we are intently focused on improving perception so guests understand that not only are we the right destination for all their needs, but we can meet those needs without compromising quality or the guest experience at prices that meet the competition.

"To boldly and accurately convey our value message we have redesigned our circular to reduce the number of sub-featured items, allowing us to enlarge photos of featured items and present bold straightforward value headlines. The changes allow us to make a stronger impact with key items and prices."

Ms. Tesija said the company’s private label brands — Archer Farms (premium) and Market Pantry (value) — continue growing, hitting a 20% penetration at the end of 2008. She predicted further growth in 2009, bolstered by a commitment at Target to develop and market the brands.

Responding to a question during the call, Doug Scovanner, a Target executive vice-president and chief financial officer, predicted penetration growth of 200 to 300 basis points per year going forward, with the figure climbing toward 30% before beginning to flatten.

Also in reaction to a question, Mr. Steinhafel starkly, if imprecisely, contrasted sales trends in food and health care products with other Target lines. On a comparable store basis, sales declined "mid-single digits" for non-food/health categories, he said, versus growth in the mid-single digits to upper double digits for food and health he said. "The latter categories "continue to perform very, very well," he said.

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