Transformation is brewing at Target Corp.

This story first appeared in the October 31, 2013 issue of WWD. Subscribe Today.

Gregg Steinhafel, chief executive officer of the Minneapolis-based retailer, on Wednesday said Target is moving from an operations model to a service one. “There’s a major cultural change in our stores,” he said during Target’s Financial Community Meeting, which was held in Toronto. “We know we have to change the culture. We have to preserve operational discipline, [but] we live in the digital world.”

One aspect of this change is a growing investment in technology as digital becomes more important to consumers within stores and out. As proof of this, Target is partnering with Net-a-porter to offer a selected assortment of the Peter Pilotto for Target collection, which bows on Feb. 9, on the U.K.-based luxury Web site. The Net-a-porter connection will give Target access to an international fashion-focused customer and raises Target’s style credibility.

The digital push also extends to brick-and-mortar. Casey Carl, president of multichannel and senior vice president of enterprise strategy, said, “We’re embracing digital technology in our stores. In the last nine months, we hired external leaders from Gilt, Hayneedle, Amazon, Gap and Estée Lauder to fill key roles.

“Our entire store assortment, including grocery, will be available online,” Carl continued. “This is foundational as we roll out our store pickup service.”

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“Digital plays a significant role in our transformation,” Steinhafel said. “Digital sales on high-margin discretionary categories are growing much faster than total sales.”

Target is working with MSX to create a mobile wallet and investing in data and technology to develop segmentation strategies. Steinhafel called the retailer’s model both centralized and decentralized. “It’s a combination of both,” he said. “We want to understand each individual guest.”

Target is funding some of these investments with capital that would have been used to open stores, since openings are dwindling as the stubborn economy continues to impact the retailer’s core consumers.

“We [Target’s operations] were built to open 30, 40, 50 new stores a year,” Steinhafel said. “That’s not going to happen in this environment.”

“With less new store investment than expected, we’ve deployed cash to grow the dividend faster,” said John Mulligan, chief financial officer. “We expect to achieve the same bottom line results, $8 in EPS [earnings per share] and a $3 dividend per share in 2017.” But it’s “unlikely that we’ll reach $94 billion in 2017” as projected. “We will not attain that.”

U.S. annual capex of $2.2 billion to $2.4 billion reflects fewer new store opportunities and is more than $1 billion below last year’s.

Steinhafel said Target wants to do more department storelike layouts — the retailer recently introduced mannequins to the apparel department — and its service staff is reminiscent of the higher-priced retail channel.

The company is finding new ways to achieve profitable growth. For example, the retailer is learning from its test of eight urban-format CityTarget stores how to make the format even smaller.

There are lots of lessons to be learned from Target Canada, which will operate 124 stores north of the border by yearend. “Initial sales in Canada have fallen well short of expectations,” Steinhafel said. “We remain confident. These are great locations. We invested to renovate them, and they’re outstanding physical assets. We will reach our long-range financial goals in the Canadian segment.”

Those goals include $6 billion in sales by 2017 and EPS of 80 cents.

“First-year sales can be difficult to predict,” said Tony Fisher, president of Target Canada. “We’re poised to generate a steeper maturity curve to reach our goals.” He said Target is trying to change long-standing shopping habits in Canada, adding, “2014 will be a year of improvement.”

Kathee Tesija, executive vice president of merchandising and supply chain, said customers are consolidating shopping trips, but buying more. “Lower- and middle-income guests are cutting trips altogether,” she said. To appeal to them, Target is emphasizing the “Pay Less” portion of its brand promise.

Tesija called out the C9 by Champion brand, saying it “earned outsized market share with adults and kids.”

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