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Target Predicts Higher Comps in Grocery, Strong Q4

“We think the majority of what we saw in October was cycling over what was by far our largest PFresh remodel program in one cycle last year.” — John J. Mulligan, EVP and CFO, Target

MINNEAPOLIS — Target Corp. here said it is projecting comparable-store sales increases in the mid- to high-single digits after posting what analysts described as relatively soft sales gains in those categories in October.

“We think the majority of what we saw in October was cycling over what was by far our largest PFresh remodel program in one cycle last year,” said John J. Mulligan, executive vice president and chief financial officer, Target, in a conference call discussing third-quarter results. “As we think about grocery going forward, mid to high comps seem reasonable for us for a run rate as we look ahead here.”

Target has rolled out its PFresh remodels, which include more space allocated to consumables, in 1,130 locations.

Gregg Steinhafel
Gregg Steinhafel

The company said its October comparable-store sales were up 2.4%, which was “near the low end” of its expected range, said Gregg Steinhafel, chairman, president and chief executive officer.

Overall third-quarter comps were up 2.9% over results from the year-ago period. The recent third-quarter gains were primarily driven by an increase in the average ticket, the company said, with a 0.5% increase in traffic. The company said the impact of inflation was not significant.

“As expected, comps were strongest in less discretionary categories, with particular strength in food and health and beauty,” said Kathryn Tesija, executive vice president of merchandising.

“Our research with guests indicates they are continuing to shop with discipline, focusing on lists and budgets and occasionally splurging on more discretionary items,” she said. “Notably in the third quarter, we saw an increase in trips focused only on need-based items. This guest feedback corresponds to overall consumer sentiment data showing that while consumers have increased confidence about their near-term prospects and personal finances, they have a high level of uncertainty about the longer term health of the economy and intend to continue saving and paying down debt.”

The company is rolling out several promotional programs for the holiday season, including a design partnership with Neiman Marcus, a holiday price match program, its REDCard loyalty program and other initiatives.

Mark Wiltamuth, an analyst with Morgan Stanley, said he expects Target to adhere to its promotional plan. “While we expect aggressiveness out of Wal-Mart and others, we suspect Target will stick to its planned promotions and may not chase discounting by others.”

City Target, Former Zeller's

Target also said its been pleased with results from its newest format, City Target, a smaller, urban format that has opened five locations in four markets: Chicago Los Angeles, San Francisco and Seattle. The company plans three more in 2013.

Tesija said the typical City Target customer skews younger and more affluent than other Target shoppers.

The company also confirmed that it is on track to open its first stores in Canada in April. The company has 45 locations — all former Zeller’s  stores — under renovation, and has one distribution center open and another expected to open “soon.”

For the third quarter, which ended Oct. 27, Target reported a 14.8% increase in net income, to $637 million, on a 3.4% increase in sales, to $16.6 billion. Through three quarters, net income was up 4.6%, to just over $2 billion, on a sales increase of 4.3%, to $49.6 billion.

Read more: Canadian food retailers brace for invasion of Target, Wal-Mart Supercenters

“Target continues its string of quarterly comparable store sales increases with a solid showing in Q3, driven by a strong back-to-school season, gains in food and health and beauty, and higher average transaction size,” said Sandy Skrovan, U.S. research director, Planet Retail.

“Looking to Q4, Planet Retail anticipates Target will finish the year on a strong note as it rings in the holiday season with the intent of winning Christmas,” she said, citing such initiatives as mobile and digital enhancements, and free Wi-Fi in all stores.

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