Target Debuts First Fresh DC

MINNEAPOLIS — As Target Corp. here begins opening its own food distribution facilities, it expects gross margins to benefit even though expenses will go up in the near term, the company told analysts during a conference call to discuss financial results for the second quarter and first half.

“The combination is a very solid economic proposition for us,” Gregg Steinhafel, president and chief executive officer of Target Corp. here, said during the call.

Target opened its first semi-automated food distribution center earlier this month in Lake City, Fla., and a second facility is due to open in 2009 in Cedar Falls, Iowa.

“Our self-distribution strategy allows us to exert greater control over the perishable food component of our supply chain, resulting in improved freshness, higher food margins and continued rapid growth of our own-brand food,” Steinhafel said.

“They are good economic projects, but they require us to spend significant capital in terms of the investment required to build and maintain and operate those facilities, so clearly, we are taking on an expense challenge. But in exchange for that we expect to see, and have seen, higher gross margins on the merchandise side and a slight deterioration in our expense rate, and the combination of those factors is a very solid economic proposition for us.”

Net income for the quarter, which ended Aug. 2, fell 7.6% to $634 million, while sales rose 5.7% to $15 billion. Comparable-store sales dropped 0.4%. For the half, net income fell 7.5% to $1.2 billion and sales climbed 5.3% to $29.3 billion, while comps fell 0.6%.

In response to a question, Steinhafel said growth in food and consumables continued to outpace other categories.

Kathryn A. Tesija, executive vice president, merchandising, said Target's grocery business continues to grow “with new offerings in Archer Farms, our differentiated own-brand, and Market Pantry, our value own-brand.”

According to Doug Scovanner, executive vice president and chief financial officer, “[The] comp-store sales performance puts us in the middle of the pack in the U.S. — clearly slower than most competitors who have a higher concentration of inflationary consumable and commodity items in their sales mix, and well ahead of most competitors with a higher concentration in home and/or apparel items in their sales mix.”

Home and apparel categories account for over 40% of Target's sales, he noted.

Given the volatility of overall sales, Steinhafel said, Target will reduce store openings in 2009 “modestly,” with between 70 and 75 openings planned, compared with between 90 and 95 projected for this year. However, while capital investment will be about the same for both years — in the range of $4.1 billion to $4.3 billion per year — “that's about $1 billion lower than our earlier thinking over this two-year period,” Scovanner said.

Target will open its first two stores in Alaska in October and expects to enter Hawaii in 2009, Steinhafel said.