NEW YORK — Just when the competition seems weak, Target is looking stronger.
The country’s third-largest discounter is on the verge of launching its biggest expansion ever, rolling out a new supercenter prototype, and has been showing numbers that outdo even Wal-Mart.
In addition, its apparel business remains one of the healthiest in the industry, notches above the typical discount presentation, and it continues to steadily test new merchandise.
Target plans to open between 60 and 70 stores in 1995 and enter the Cleveland market with a cluster of stores. That sets the stage for a probable expansion into the Northeast, the only region in the U.S. where Target does not operate.
Target’s aggressive growth plan for 1995 is driven by:
A corporate parent that is hungry for meatier profits. DH’s earnings declined 2 percent to $375 million in 1993 from $383 million.
The misfortunes of Kmart Corp. Target has an opportunity to pick up market share from Kmart, which ranks ahead of Wal-Mart as its chief competitor in the soft-goods sector.
Robert J. Ulrich, who knows the potential of Target, the division he ran since 1987 until becoming DH chairman and ceo in July.
“Target is trying to seize an initiative at a point when they feel that the opportunity is there,” said Arnold Aronson, a partner in Levy, Kerson, Aronson & Associates consulting. “I don’t think anybody in that segment wants to let Wal-Mart run away with the business.”
Target, a $12 billion division of Dayton Hudson Corp., is not about to surpass the $67.3 billion Wal-Mart as the nation’s top discounter. But last month, Target achieved a 9.9 percent same-store sales increase, which led the discount-store pack.
It also marked the second consecutive month Target has outperformed Wal-Mart’s discount division, which posted an 8.1 percent same-store sales increase in November and a 4.9 percent gain in October. Target’s same-store sales increase was 6.5 percent in October.
The 611-unit Target has an upscale format, with clean presentations and wide aisles, which puts it into competition with lower-end department stores.
With the exception of Target and Wal-Mart, many other discounters are closing stores or reorganizing management. Weak apparel sales this year have cut into their profits, and increased competition from department stores has taken away some of the discounters’ pricing edge.
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But Target is set to roll along. Its store-opening plans account for the major chunk of parent company DH’s $1.3 billion capital expenditure budget next year. Mervyn’s will open four stores and the department-store division will add one Marshall Field’s unit outside Chicago.
Expansion plans at Wal-Mart, which operates 1,980 discount stores, next year call for 100 discount stores and 100 supercenters, a combination discount and full-line grocery store.
Target will test this format next year, too, with supercenters set to open in Omaha, Neb., in March and Lawrence, Kan., in October. They will have about 170,000 square feet, compared with the typical 125,000 to 135,000 square feet for a conventional Target unit.
Target executives declined to be interviewed, but analysts said Target’s growth should be enhanced by the problems at Kmart. Kmart, which is struggling to remodel stores and lift sales, plans to close 110 stores early in 1995 and many analysts expect the retailer to shutter more underperforming units as the year goes on.
DH’s focus on discounting has spurred reports that the corporation wants to spin off its department stores. In November, DH denied it was in talks with May Department Stores, while May Co. would not comment.
Target accounts for 61 percent of DH’s annual volume and about 60 percent of its operating profit. In the third quarter, Target reported a 15 percent increase in total sales and “significantly” improved operating profits. DH did not disclose the size of the profit increase.
Kim Walin, analyst at Lehman Bros., said Target’s 9.9 percent same-store sales increase in November was excellent.
“Obviously, they had some pretty good promotional activity over the Thanksgiving Day weekend,” she said. “The strength of the number, up until Thanksgiving, was still oriented toward hard lines, as it was for most retailers, but the soft goods kicked in the last week (of November).”
Jeff Edelman, an analyst at C.J. Lawrence, said Target has turned up its promotional activity and advertising. “I think that’s what’s been driving their sales,” he said.
One of the keys for Target is that it does not position itself as a true discount operation, analysts said. It invests more in store design and construction and then stocks the shelves with higher quality merchandise compared to other discount chains. “Target attempts not to be a discount store, but to be a department store alternative,” Tom Tashjian, an analyst at First Manhattan, said. “As a result, consumers understand that the quality of the merchandise is a tad better and that the pricing continues a value equation. At the same time, it is sort of an upper-middle income presentation.”
Mackey McDonald, president, VF Corp., which is testing its Riders brand at some Target stores, said the retailer does well with fashion because it has been selling the category longer and more in depth than most of the competition.
“Part of it is related to a challenge that’s given to the buyers, but it’s also the logistics,” McDonald said. “They have the support for the fashion once it gets in the store; they present it well.”
Walin said Wal-Mart continues to be “viewed as the price leader,” but Target’s soft-goods presentation leads the industry. “They have done a very good job (with soft goods) and they take more of a fashion approach than Wal-Mart does,” she said. “They don’t treat apparel as a commodity and they tend to give a little bit of sizzle to the area. So far, the customer has responded.”