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Target: Home commodities driving the department

Minneapolis – While home proved a flat business for Target Corp. during the first quarter, elements of the department, specifically “replacement” products, were bright spots versus more discretionary and higher ticket assortments.

“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 this morning.

“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 added.

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 in addition to shoppers tilting 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 kind of shift.”

Even so, Steinhafel stressed Target’s latest push in marketing toward the retailer’s “pay less” approach on values and savings.

“In this environment we’ve been working hard to accentuate the ‘pay less’ side of the brand promise – it’s [evident] 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." Because consumers are conditioned to expect stale merchandise during a down economy, Target is working to freshen and differentiate its assortments.

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 versus 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 [discretionary 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.

Looking to the second quarter, Target expects current trends to continue, and has therefore heightened its focus on “our frequency-driving businesses – pharmacy, food and commodities “and the “pay less” side of its brand.

In addition, it continues to expand its own brand presence across the store and remains “intently focused on managing our inventories and being in stock,” Steinhafel said.

For the first quarter ended May 3, profit fell 7.5% to $602 million for the first quarter ended May 3, while earnings per share decreased 1.4% to 74 cents. First quarter gross margin rate declined slightly due to faster sales growth in lower margin rate categories.

Sales rose 5.0% to $14.3 billion, with comps slipping 0.7%.

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