Food Shoppers Trade Down at Target

Target Corp. said last week it is boosting its focus on frequency-driving categories like food, pharmacy and commodities as consumers reduce spending on more discretionary categories. We'd love nothing better than to have the inflationary pressures go away, Gregg Steinhafel, president and chief executive officer, told industry analysts during a conference call to discuss financial results

MINNEAPOLIS — Target Corp. said last week it is boosting its focus on frequency-driving categories like food, pharmacy and commodities as consumers reduce spending on more discretionary categories.

“We'd love nothing better than to have the inflationary pressures go away,” Gregg Steinhafel, president and chief executive officer, told industry analysts during a conference call to discuss financial results for the first quarter that ended May 3.

“We've been experiencing some inflation in [food and consumables] since the fourth quarter and throughout the first half of this year,” he said. “But as we move into the year, we're seeing more inflation in other, discretionary categories.”

He also said inflationary pressures in food are slightly higher this year, resulting in some trading down.

Douglas Scovanner, executive vice president and chief financial officer, said food categories “need a lot of careful interpretation right now. [Consumer Price Index] measured food inflation in April at nearly [6%], so anybody that's running less than [that] in food is either experiencing some trading down in units or a reduction in unit sales.”

Net income for the quarter fell 7.5% to $602 million, which the company attributed to softer-than-expected sales, while overall sales grew 5.4% to $14.8 billion and comparable-store sales fell 0.7%.

Scovanner said Target expects top-line growth to remain sluggish “until we see some stability or improvement in the economic environment.”

In response to a question, Steinhafel said comp-store trends at Target and SuperTarget stores are running at similar levels. That didn't surprise him, he added, “because there's a stronger food component in all of our general merchandise stores, and because a greater share of our SuperTargets are competing directly against Wal-Mart Supercenters than our general merchandise stores, so the food environment there is significantly more competitive.”

In other comments during the call:

  • Steinhafel said pharmacy customers visit the stores more frequently than the average shopper, “and their baskets, in general, are larger than the typical transaction.”

  • Private-label penetration storewide is between 35% and 40%, he said. “We continue to add 200 or 300 basis points in food per year, and we should be pushing the 20% range by the end of the year.”

Q1
RESULTS
Qtr Ended 5/3/08 5/5/07
Sales $14.8B $14B
Change +5.4%
Comp-store -0.7%
Net Income $602M $651M
Change -7.5%
Inc/Share 74 cents 75 cents