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Target plans for slowdown of deflation

Target predicted a slowdown in price deflation this year, and said deflation last year amounted to about 4 percent of sales across the store.

"This year, that is not at all likely to repeat," said Bob Ulrich, chairman and CEO, speaking to analysts during the company's first quarter conference call last week. "It is premature to tell whether the actual outcome will be a much more modest rate of deflation or simply neutral to slight inflation. In either event, the outcome would not be nearly as deflationary as last year."

However, the elimination of quotas next year would lower prices, according to Gregg Steinhafel, president of Target Stores. Addressing apparel specifically, he said Target expects deflation of 10 percent "if quota does go away, and there's not any other offset."

China is now Target's largest trading partner, he said. However, the company intends to source from "a balanced portfolio" of countries around the world, he added.

"There are a lot of moving parts here where there are pluses and minuses," he said.

Target also plans to leverage its 2,000-person AMC organization to boost direct imports to 30 percent of the overall product mix from 15 percent today.

"Most of that investment is in place, and we have been scaling that up on a fairly aggressive basis," Steinhafel said, noting AMC now operates 50 offices around the world. "As we grow in size, we should have no difficulty in ramping up the business we have in AMC."

The company also cautioned analysts to consider the big picture in regard to cost reductions, which are partially offset by higher expense rates. By way of example, Doug Scovanner, executive vice president and chief financial officer, noted that Target is now employing "a substantial number of people in hardlines design in order to support future shifts of certain hardlines products from indirect imports to direct imports. The design capacities we have here in Minnea-polis manifest themselves in SG&A expenses, but they will also manifest themselves in increased gross margin rates on an item-by-item basis."

Turning to merchandise initiatives, executives said Target's T-2004 prototype stores that opened in March exceeded sales projections by 20 percent. The better-than-expected response resulted in some significant out-of-stocks during the first 30 to 40 days of operation, but the company has now adjusted its supply-chain flow to address the situation, according to Bob Ulrich, chairman and CEO.

"We've found, over a period of time, it's much easier for us adjust upward rather than overstocking the stores," he added.

According to Steinhafel, the company is "moving quickly to incorporate the essential elements" of the prototype into other stores.

Last fall, Target retrofitted about 80 stores to incorporate elements of T-2004, he added. This year, Target will retrofit 130 more stores. In addition, by year-end, there will be 200 Target stores that fully reflect the prototype, including new units and full remodels. The format includes significantly broader selections of food and consumables toward the front of the store, as well as a bigger presence of home, entertainment-related products, and mother and baby goods.

Ulrich noted that the company has seen less than two month's worth of results so far.

"I do not want to leave the impression that we have formed a new paradigm," he said. "I think it's premature to pass judgement of any fundamental kind as to what we are up to."

The test of a $1-priced assortment of goods at the front of the store is still being evaluated, Steinhafel said. The concept is now in 125 stores in configurations ranging from 60 square feet to 80 square feet. Target has cycled through tests of two merchandise assortments in the dollar bin, but hasn't decided whether to roll out the program nationally.

"It's basically an incremental add-on to the overall basket for those stores," he added.

Overall, Target expects modestly stronger growth in sales and profits in the first half of the year than in the second half, primarily due to tougher back-half comparisons, particularly early in the fourth quarter, executives said.

The company's full-year comps are expected to range from 4 to 5 percent, they said.

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