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Target Hammers Away on Price

Target is expecting more from the "pay less" side of its motto going forward, promising its shoppers to match Wal-Mart's prices on like merchandise as the 1,648-unit upscale discounter responds to persisting economic doldrums.

That does not mean Target is backing off the risks it takes in its fashion offerings. "Our mix of sales — not our fashion risk — has been the biggest challenge to our gross margin rate, representing about a 60 to 70 basis point effect in the quarter and year to date. I believe sales mix will continue to represent a bigger challenge than markdown in the future as well," said evp, cfo Douglas Scovanner to analysts during the recent quarterly earnings call.

The home category slumped in the second quarter, which turned out to be the fourth in a row in which Target was flat or down in comp-store sales. Target's home business has suffered "some trade-down" in its domestics categories "where shoppers are being perhaps a little bit more selective in what they are buying," said Kathryn Tesija, evp merchandising. "For example, [they are buying] a comforter vs. a duvet or a piece of the bed and not the whole bed."

Still, some of the chain's self-described "best" aspects of home, like the Fieldcrest program, which was re-launched in March, are doing good business, she said: "Fieldcrest continues to perform exceptionally well."

Overall, by turning a second-quarter 7.6% earnings decrease into a 2.4% earnings per share increase, Target exceeded its second-quarter projections. Net earnings of $634 million for the quarter ended Aug. 2 fell from $686 million in the year-ago period. But EPS (diluted) increased to 82 cents from 80 cents last year.

Sales (including credit card revenues) of $15.0 billion grew 5.7% from $14.2 billion in 2007, while comps were off 0.4%.

Gross margin fell 40 basis points to 31.2% of sales for the quarter and decreased 20 basis points to 31.0% for the first half of the year. The quarterly SG&A rate of 20.9% of sales beat the year-ago rate by 60 basis points, while the year-to-date rate of 21.0% was better by 20 basis points.

"We remain keenly focused on assuring that our prices are the same as Wal-Mart's on all identical and similar products in local markets," said Tesija. "We realize our greatest opportunity is in communicating our value and convenience messages to our guests."

Target is embarking on several value-focused efforts and has altered its circulars to showcase "fewer products with bigger images, bold price points and strong value headlines." Tesija said.

The chain is also "reevaluating" in-store presentation. "In addition to featuring products that are on sale, we are ensuring that our signage clearly communicates value and that we have a healthy number of endcaps with low price points across the store," she continued.

A stepped-up good-better-best assortment is also in the queue. "This means we carry a variety of skus within a range of price points, all of which deliver exceptional value based on the design and quality of item, whether highest or lowest price point in category," she said.

Consumables, food, and health and wellness goods continue to outpace the growth of home and apparel, which is "not a new phenomenon but rather one that has been going on for some time," said Gregg Steinhafel, president and ceo. "It's not the fashion or innovation that is underperforming. It's more the basic items that we are not able to capitalize on in this market. But we are in a fashion cycle and people want to be inspired."

In one inspiration-keyed initiative, New York City dwellers will have direct access to Target and its assortments that comprise products by 22 renowned designers — "the most we've ever featured in store at one time," Tesija said — from Sept. 11 to 14 when the retailer opens four limited-time spaces dubbed Bull's Eye Bodegas, one each in Midtown, Union Square, Soho and the East Village.

These temporary stores will feature home, fashion, beauty and accessory goods carrying an average price point of $25.

Target Corporation

Qtr. 8/2 ($ millions) 2008 2007 % change
(loss)
a. Retail sales; does not include credit card revenues.
Sales $14,971a $14,167a 5.7%
Oper. Income (EBIT) 1,220 1,267 (3.8)
Net income 634 686 (7.6)
Per share (diluted) 0.82 0.80 2.1
Average gross margin 31.2% 31.6%
SG&A expenses 20.9% 21.5%
Six months
Sales $29,273a $27,790a 5.3%
Oper. Income (EBIT) 2,378 2,468 (3.6)
Net income 1,237 1,337 (7.5)
Per share (diluted) 1.57 1.57 0.2
Average gross margin 31.0% 31.2%
SG&A expenses 21.0% 21.2%


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