Fresh Offerings Drive Target's Food-Sales Growth

MINNEAPOLIS Target Corp. here said last week consumers are most interested in buying fresh products from its expanded grocery offerings. We've learned a lot as we've gone along, Kathee Tesija, executive vice president, merchandising, told investors last week in a conference call discussing third-quarter results, and we've done some tweaking to the assortments as we've realized fresh product is really

MINNEAPOLIS — Target Corp. here said last week consumers are most interested in buying fresh products from its expanded grocery offerings.

“We've learned a lot as we've gone along,” Kathee Tesija, executive vice president, merchandising, told investors last week in a conference call discussing third-quarter results, “and we've done some tweaking to the assortments as we've realized fresh product is really the most-wanted item on the guests' lists every week.”

While Target's assortments of dry groceries, dairy and frozen items vary from market to market, the mix of fresh products is pretty stable across all markets, she noted.

The company has adjusted the number of facings for some products in its P-fresh departments, Gregg Steinhafel, chairman, president and chief executive officer, pointed out.

“In the aggregate, we were dead right on the assortment, but the rate of sale was a little different than we expected,” he said. “So the big adjustment has really been about the number of facings we've applied to the various items within the assortment. Sometimes it involved moving the presentation from one part of the store to another, or we changed lead-ins or what was on the back wall or what we stood for in terms of making a bigger impact.”

Target has 462 stores that have undergone P-fresh remodels, and with food at 251 SuperTarget stores, fresh food is now available at about 40% of the company's 1,752 stores, executives pointed out.

The inclusion of expanded food sections helps lift a store's business “almost instantaneously.” Steinhafel said.

“Once we reopen the store [with a P-fresh remodel], we see a lift of approximately 6% throughout the total store — and based on what prior footprint existed [for food items] before the remodel, we see anywhere from a 40% to a 60% increase on the food side of it.

“Over time we expect those numbers to improve,” he added. “In the second and third year out, we expect sales increases to continue, though to a much lesser extent. But over a couple of years, we fully expect to see potential increases of around 10% from a pre- and post-timeframe.”

Asked about the impact of inflation in the food category, Doug Scovanner, executive vice president and chief financial officer, said he believes the impact will be “fairly subtle — not item by item but overall. It's clearly our objective to try to preserve margin rates, with the only caveat being that if the competitive landscape won't allow that, we will certainly remain competitive and adjust appropriately.”

Steinhafel said Target's food supply chain will remain a hybrid for the next two to four years, with C&S Wholesale Grocers, Keene, N.H., continuing to supply food on the East and West coasts and Target controlling the supply chain through the center of the U.S. “We still do some food distribution through Supervalu, although that is winding down over the next couple of years,” he pointed out.

For the third quarter, which ended Oct. 30, Target said net income rose 22.6% to $535 million, with total revenues — including sales and credit card revenues — up 2.2% to $15.6 billion and comps up 1.6%. For the year to date, net income increased 21.4% to $1.9 billion, with total revenues climbing 3.4% to $46.7 billion.

The company also said it is well-positioned for the fourth quarter and expects comparable-store sales to be the best of any quarter in the last three years.

Q3 RESULTS

Qtr Ended 10/30/10 10/31/09
Sales $15.6B $15.3B
Change +2.2%
Comp-store +1.6%
Net Income $535M $436M
Change +22.6%
Inc./Share 74 cents 58 cents
40 Weeks 2010 2009
Sales $46.7B $45.2B
Change +3.4%
Comp-store N/A
Net Income $1.9B $1.6B
Change +21.4%
Inc./Share $2.57 $2.06