NEW YORK — Target’s discount stores are finding food more fashionable than apparel.
On Thursday, Target Corp. said it’s cutting back on space for apparel, hoping to drive more traffic into its discount stores with additional food offerings. The retailer also is strengthening its emphasis on low pricing and communicating that value to its customers through circulars and advertising.
Those revelations came on a conference call reporting the first-quarter results of the Minneapolis-based retailer, which were basically on par with a year ago on the bottom line, and relatively sluggish on the top line with a 7.6 percent rise.
Investors reacted by trading shares of the firm down $1.47, or 4.1 percent, to $34.46 on the New York Stock Exchange Thursday.
“As we continue to emphasize price on some branded consumables, that business has been stronger than our home business or our apparel business,” said Gregg Steinhafel, president of the Target division.
Changes in space allocation will not be across the chain. New and remodeled stores from the fall season forward reflect the revamped layouts. Fewer than 100 Target discount stores also will be made to fit the new mold.
For food, more space will be added to the beverage, dry grocery, dairy and frozen categories. Apparel, especially men’s, will be downsized in addition to the automotive, home improvement and sporting goods areas.
As reported, food is a critical part of Target’s growth strategy, but has yielded mixed results in its performance thus far. The SuperTarget concept, which incorporates perishable as well as packaged and frozen foods, has received a lukewarm reception from Wall Street analysts so far.
“Men’s has been an underperforming category nationally for some time and we’re adjusting space to be reflective of what we believe the outlook to be in the future, which is again a softer-than-average growth,” said Steinhafel.
Women’s ready-to-wear actually will expand slightly with more space in the maternity area and a concomitant increase in infant and toddler space. Kids will slightly deemphasize boys’ in favor of girls’ apparel.
“We’re not walking away from any of the businesses that you see in the stores today,” Steinhafel assured analysts on the call. “The dynamics are changing quite a bit overall in the apparel side of the store and, in total, it’s coming down just slightly, but we’re making some shifts and some trades to more accurately reflect what we believe the business potential to be in the future.”
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Target is hoping to offset declines in space allocated by reexamining rack density and fixtures, trying to come up with ways to deliver the same product content, look and impact in its apparel department.
Net income for the first quarter inched up 1.2 percent to $349 million from $345 million a year ago. Earnings per share for both periods tallied 38 cents. Total revenues for the three months ended May 3 advanced 7.6 percent to $10.32 billion from $9.59 billion a year ago. Comparable-store sales at the firm dipped 0.1 percent.
At the flagship discount division, pretax segment profit picked up 8.3 percent to $734 million from $678 million a year ago. Sales increased 9.8 percent to $8.82 billion from $8.03 billion a year ago, on a 1.1 percent comp increase. SuperTarget’s comps were more or less in line with the performance of the discount stores.
Lazard Frères & Co. analyst Todd Slater noted: “There’s an ongoing realization that food drives traffic and that we’re in a weak apparel cycle. Apparel is not as important a category in the current consumer cycle. Apparel is a deemphasized priority for consumers and retailers that have the flexibility to make these changes are reflecting that reality.”
Target’s belt tightening comes at a time when the firm’s chief competitor, Wal-Mart, is beefing up its apparel business, though both firms have had less-than-robust apparel sales recently.
Wal-Mart has been making moves to declutter its apparel space, incorporating touches like larger, simpler signs and standardized fixtures, in addition to building up its George label and adding Levi Strauss & Co.’s Signature for back-to-school.
Still, Slater said, “Target runs circles around Wal-Mart in apparel, on average. If anything, Wal-Mart is overassorted and overinventoried in apparel right now and is in a defensive, liquidating strategy.”
Davenport & Co. analyst David Campbell added, “Wal-Mart has a much bigger allocation to food, so Target is just evening the differential a little bit.”
He noted that the Target discount stores still won’t offer fresh food items such as meats, vegetables and fruits, which SuperTargets stock. “They are trying to get more traffic, hoping that people will come in to buy some and go buy some apparel or something like that.”
With the flat bottom line, the analyst called the quarter’s results “nothing to get excited about.”
Steinhafel said the financial results affirmed Target’s business strategy and that the discounter was dedicated to maintaining its competitive advantage with exclusive brands, design partnerships and hip marketing.
The other half of the “Expect More, Pay Less,” model, though, is value. Steinhafel said Target remains committed to matching Wal-Mart’s prices in local markets on identical items and would be more aggressive in communicating its value message in its broadcast advertising and weekly circulars.
The chain is in the process of “modestly increasing” its advertising emphasis on items that drive frequency and will time the marketing of selected brands to generate excitement, he said.
Steinhafel pointed out that over the past nine months, SuperTargets have been reducing their dependence on promotional pricing for consumables and perishables while strengthening their everyday pricing posture on the grocery side of the business.
Elsewhere under the corporate umbrella of Target, Mervyn’s first-quarter pretax segment profits sank 53.8 percent to $24 million on a 6.8 percent drop in sales to $804 million. Pretax segment income at Marshall Field’s fell 40.6 percent to $19 million on a 5.6 percent decrease in sales to $590 million.
Target’s credit card operations, results of which are included in the segment profits, on their own contributed pretax profits of $151 million, a 31.3 percent rise. Total credit revenues shot up 31.4 percent to $339 million.