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Commodities Driving Home at Target

Cecile Corral, Marvin Lazaro -- Home Textiles Today, June 2, 2008

While home proved a flat business for Target Corp. during the first quarter, elements of the department, specifically "replacement" products, were bright spots vs. the dimmer discretionary and higher ticket goods.

"In our domestics business, we're seeing terrific growth in our towel business and in our Valley of Flowers sheet world," president and ceo Gregg Steinhafel commented during the company's quarterly analyst call last month.

"People are coming in and buying replacement pillows and sheets, but not the entire ensemble of top of bed and shams and duvets along with those sheets. There is more selective purchasing on the consumer's part," he said.

Similarly, Target's seasonal business, which Steinhafel ventured "is soft in every other retailer as well," is nonetheless experiencing "robust growth in replacement businesses like seating and cushions and some of the accessory categories, but we're not doing well in sets. The mix of those two still generated a same-store sales decline, but it's healthy in one part and not so healthy on the other side."

Related to this trend, he noted, is "some trade down" in price points throughout the store as shoppers tilt their purchases away from "the more expensive, discretionary categories."

Quick to clarify that remark, Douglas Scovanner, evp and cfo, offered: "It's a shift of units more so than a shift of best-to-good."

Even so, Steinhafel stressed Target's latest push in marketing toward the retailer's "pay less" approach on values and savings, referring to the slogan, "Expect More. Pay Less."

"In this environment we've been working hard to accentuate the 'pay less' side of the brand promise — it's [evident in] the selection of merchandise we put on the end caps, making sure we have style and value messaging, that our circular messaging and print marketing have a much more dominant impact around price and savings and value, in addition to what we typically would do in terms of differentiation and seasonal content."

He continued that Target is "very mindful that the consumer is very cash-strapped right now and is looking for good values. They are expecting more sale merchandise, and we're responding by ensuring our assortments reflect their desires."

Target's recent circulars most clearly demonstrate the new effort.

"We have a much stronger headline commitment speaking to value and savings [in] the way we organize our products, we've highlighted headlines focusing on value, how we aligned our frequency businesses and created bigger more dominant spaces within that circular and calling greater attention to the pricing," he said.

"If you compare the circulars today vs. the circular we published six months ago, you will see differences in the messaging and you will see a much stronger narrative speaking to the value side of our brand promise."

Home and apparel were singled out as two discretionary categories where inflation is having an impact on price points. Home's inflation spans anywhere from 2% to 3% through 9% to 11% levels, depending on the product — but "in general" in the 5% to 8% range, Steinhafel said.

"Our response has always been to work with our suppliers so that we don't have to accept [price increases] or delay them or accept a smaller portion of them," he said. "But if they do come to us and we have to accept them, which in some cases we do, we are looking to pass those along in the marketplace as a matter of last resort. We are planning on increasing retails in those businesses … where we have to absorb some of those price increases."

Discretionary categories, which include home and apparel, comprise about 40% of Target's total assortment, Steinhafel said.

For the first quarter ended May 3, profit fell 7.5% to $602 million, as earnings per share decreased 1.4% to 74 cents. Sales rose 5.0% to $14.3 billion, with comps slipping 0.7%.

Target Corporation

Qtr. 5/3 ($millions) 2008 2007 % change
(loss)
a. Retail sales. Total revenues, including credit card revenues, were $14.8 billion in 1Q08, up 5.4% from $14.0 billion in 1Q07.
b. Includes earnings from credit card segment. Retail segment earnings before interest expense and income taxes (EBIT) were $959 million in 1Q08, down 2.2% from $980 million in 1Q07.
Sales $14,302.0a $13,623.0a 5.0%
Oper. Income (EBIT) 1,158.0b 1,200.0b (3.5)
Net income 602.0 651.0 (7.5)
Per share (diluted) 0.74 0.75 (1.4)
Average gross margin 30.8% 30.9%
SG&A expenses 21.2% 21.0%


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