http://www.businessweek.com/magazine/why-targets-cheapchic-glamour-is-fading-09222011.html

Retailing

Why Target’s Cheap-Chic Glamour Is Fading


On a conference call earlier this year while discussing Target’s (TGT) 2011 same-store sales forecast, Chief Financial Officer Douglas Scovanner noted that his company’s biggest rival, Wal-Mart (WMT), had been taking heat from Wall Street for its weak retailing performance. The largest player in the marketplace had yet another quarter of negative same-store sales, he said: “People are picking on my big brother.”

For years, Target has benefited from such comparisons. Target’s merchandise was trendier, its commercials hipper, its employees happier—or so the meme went. Of late, however, Target has found it increasingly difficult to tell that story.

Investors unhappy with Target’s anemic sales growth have demonstrated their displeasure by driving down the share price 14 percent this year. Labor unions, after years of docility, are waking up to the fact that Target’s wages and benefits are much the same as Wal-Mart’s. Rivals have swiped Target’s cheap-chic playbook, meaning shoppers who long ago dubbed the chain “Tarjay” can find low-priced designer gear elsewhere. Much has been made of Wal-Mart’s inability to increase its U.S. business; same-store sales, the holy grail of retail data because only established stores are counted, were flat in the first half of 2011 after dropping for almost two years. Yet the picture at Target isn’t much better.

According to conventional wisdom on Wall Street, Target shoppers who traded down to Wal-Mart during the recession would rush back to Target once the economy began growing again. Thus far, it hasn’t happened, which helps explain why Target’s shares are underperforming two-thirds of the 95 companies in the Standard & Poor’s 500 Retailing Index. This despite stock buybacks worth $1.5 billion, or 4 percent of outstanding shares, in the first half of this year.

Target Chief Executive Officer Gregg Steinhafel is opening fewer stores these days. So to boost sales, the retailer has been adding groceries to its product lineup at existing stores and giving 5 percent off on purchases made with a company-issued debit or credit card. While these measures have helped revenue, they’ve also hurt the bottom line. Strip out low-margin groceries and the 5 percent discount, and same-store sales grew less than 1 percent this year—about the same as Wal-Mart.

Target’s credit-card unit generated about a quarter of income in the first half, while profit from the stores was flat. That money machine won’t be around for much longer; Target plans to sell the division as early as this year and use the cash to buy more stock and pay down debt. Like Wal-Mart, Target generates about 2 percent of revenue online. It only took control of its e-commerce site from Amazon in August. The day the revamped site went live, links such as “learn all about what’s new” didn’t work. Earlier this month the Web store crashed when demand for products from the Italian fashion house Missoni exceeded expectations.

Target executives insist sales will pick up in the second half of the year. They point to a 4 percent jump in same-store sales last month and say plans to open small-format stores in U.S. cities, expand into Canada, and improve e-commerce will help boost annual revenue 48 percent, to $100 billion, by 2017. “We believe that our shares currently represent an exceptional value,” said Chief Financial Officer Douglas A. Scovanner in a statement.

A few years ago fast-fashion emporiums like Hennes & Mauritz and Forever 21 seemed the only real threat to Target. Now everyone from Kohl’s (KSS) to J.C. Penney (JCP) to Kmart have embraced cheap chic, too. “Competitors have learned from Target,” says Carol Spieckerman, a retail consultant whose clients include Target suppliers. “Now, it needs something new.”

The retailer has another problem: It’s increasingly a focus of activists who have spent the past decade lambasting Wal-Mart for its perceived sins. Last year, gay rights advocates organized a boycott after Target gave $150,000 to a group supporting Tom Emmer, a Republican candidate for Minnesota governor who opposed gay marriage. This summer, Target drew flak for turning away a union drive at a store in Valley Stream, N.Y. A former Target executive sums up the retailer’s existential moment this way: “Target has been able to hide behind Wal-Mart’s size, and I don’t think it can do that anymore.”

The bottom line: Target won fame as the antithesis of stodgy Wal-Mart. Now, at $68 billion in sales, it needs to refine its strategy to kick-start growth.

Townsend is a reporter for Bloomberg News in New York.

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