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Spokane, Washington  Est. May 19, 1883

Target to launch new brands, lower prices after quarterly results disappoint

By Kavita Kumar Minneapolis Star Tribune

NEW YORK – Target Corp. will invest in lowering prices, remodeling hundreds of stores, and launching more than a dozen new exclusive brands over the coming year in an effort to jump-start sales that continued to fall in the most recent quarter.

Executives for the Minneapolis-based retailer took to a stage in New York on Tuesday to lay out a road map for the company this year that includes making financial sacrifices in terms of bringing down sales and profit targets while they adjust to the “seismic shifts” taking place across the retail landscape as more consumers shop online.

“We’re investing to win share – not surrendering,” Target CEO Brian Cornell told investors. “There will be winners and there will be losers in this new era in retail. This plan is all about coming out on top.”

Target will take a $1 billion hit to its operating margins, resulting in lower profits for the coming year, as it readjusts its business. It will also invest more than $7 billion over the next three years on these new initiatives.

Its shares fell 12.2 percent in trading Tuesday and closed at $58.77 after the company reported lower-than-expected sales and profits in the fourth quarter and as it pared back financial goals.

For the upcoming year, Target said it expects a low single-digit decline in comparable sales. The forecast is a dramatic retreat from the retailer’s previous growth plans. A year ago, Target executives told investors the company hoped to grow comparable sales by 3 percent or more this year. Executives did not provide guidance beyond this year as it has in the past, saying that the landscape was too “uncertain” to give realistic targets.

Executives emphasized that this year will be focused on making investments in the company to pave the way for future growth down the road.

While Target in the past focused on promotions sales to highlight value to shoppers, executives said Target will instead lower prices in more of an everyday low price approach similar to Wal-Mart. The move comes as Wal-Mart has been doubling down on lowering prices and has been seeing traffic and sales to its stores increase as a result.

Building on the success of new brand launches last year such as Cat & Jack and Pillowfort, Target will also launch more than 12 new brands, representing more than $10 billion in sales, over the next two years.

John Mulligan, Target’s chief operating officer, said the retailer will remodel about 100 stores this year with many of the new displays and other enhancements, as well as new ones, that the company has been testing in Los Angeles as well at a store in northeast Minneapolis. Target will hasten the pace of those remodels to 250 next year and hope to have 600 of its 1,800 stores “reimagined” by 2019.

“There’s a large percentage of the portfolio where the buildings don’t match the brand,” said Cornell. “They’re old. They’re tired and haven’t been updated in years.”

Each of the remodels, he added, will “look and feel like an entirely new Target.” Executives said each remodel is expected to lead to a 2 to 4 percent increase in sales at those stores.

In addition, Target will accelerate its pace of new smaller stores that it has been slowly building in cities in the last couple of years. While it opened 15 such stores last year, it will open about 30 of them this year and will ramp up the pace to 40 new stores a year by 2019. These stores, Mulligan noted, have double the sales productivity of its larger, suburban stores.

While many retailers such as Macy’s and J.C. Penney have announced plans to shutter stores, Target executives said they will continue at their previous pace of closing about 10 to 15 underperforming stores a year. They added that they see their stores as a key asset in that they double as fulfillment centers for online orders that are either sent to customers’ homes or available for in-store pickup.

Cornell noted that most of its stores are in prime locations – and are not, he added, “in dying malls.”

Target, whose online sales have doubled in the last three years, will continue to enhance its digital assets by, for example, combining its popular Cartwheel app with its main Target app later this year to offer a more simplified experience. It will also roll out ship-from-store capabilities, which helps get packages to customers faster, to the rest of the 800 or so stores that don’t currently have it by 2019.

Comparable sales in the fourth quarter, which included the holiday period, dropped 1.5 percent, at the low end of its revised forecast. Lower store sales were partly offset by a 34 percent increase in digital sales.

Profits dropped 43 percent to $817 million, compared to $1.4 billion in the same quarter a year ago. Adjusted for one-time items, Target reported earnings per share of $1.45, lower than the $1.51 analysts expected.

“Our fourth quarter results reflect the impact of rapidly-changing consumer behavior, which drove very strong digital growth but unexpected softness in our stores,” Cornell said in a statement.

Last month, Target first warned investors that sales and profits during November and December came in lower than expected.

Its performance contrasts with that of Wal-Mart, which has seen sales and traffic steadily rising, including a 1.8 percent increase in comparable store sales during its fourth quarter.

Last year, Target’s top brass used the investors meeting to lay out a vision of driving growth at Target through focusing on the fundamentals – making sure shelves are properly stocked, that its website and apps always work, and that its groceries are always fresh. But while it laid out a goal to grow comparable store sales last year by 1.5 to 2.5 percent, it ended up falling short of that goal with a 0.5 percent decline.

Sales have dropped as traffic to its stores has also petered out. Target has singled out lower sales in grocery and electronics in particular as being soft spots all year.

While executives didn’t mention groceries at all during their presentation, analysts peppered them with questions about that challenging part of the store during the question-and-answer period.

Cornell said he’s “very focused” on improving the grocery business and will be making sure the retailer is competitively priced in that department.

Mark Tritton, Target’s chief merchandising officer, added that the new grocery displays and layout being tested in Dallas and Los Angeles have paid off and are being rolled out to other stores as part of the store remodels. He also said that Target has made investments in improving its fresh produce through the supply chain.

For example, Tritton said Target now makes daily deliveries of fresh produce to stores instead of multiple times a week.