After more than two years of being outdistanced by Wal-Mart Stores Inc., Target Corp. said it is coming out with guns blazing, planning to prove it is the low-price leader and offers better quality than its larger rival.
Target wants to retool the way many customers view both it and Wal-Mart, Chief Executive Gregg Steinhafel said. “Regardless of the economic environment going forward, we’ll continue to address the gap between the perception and the reality of our pricing.”
Wal-Mart is generally perceived as the low-cost leader. Target will also “maintain our focus on fashion, design and a superior store experience,” Steinhafel said.
Wal-Mart appears largely unimpressed with the prospect. Chief Financial Officer Tom Schoewe said in a call with reporters that Wal-Mart feels its customers “trust” that it will have the lowest prices.
Target says it gained market share last year despite the tough economy. The retailer now has “plans in place to accelerate that trend in 2010,” said Kathryn Tesija, executive vice president of merchandising.
Target posted fourth-quarter same-store sales growth of 0.6 percent while Wal-Mart reported a 1.6 percent drop for the same period for its U.S. Wal-Mart stores and Sam’s Club warehouses. This was the first time Target outperformed Wal-Mart since the third quarter of 2007, Thomson Reuters said. Wal-Mart, though, was coming off a tougher comparison — a gain of 2.8 percent — while Target had posted a 5.9 percent decline in fourth-quarter same-store sales a year ago.
Remodels of 350 stores this year, greater fresh food assortments and “inspirational signage” will all assist, Tesija said. Target also said it is upgrading its home, beauty, and games departments.
The huge question is how much of a dent Target can make since Wal-Mart has also been hard at work focusing on its domestic stores.
While Target was upbeat about its prospects, Wal-Mart sounded a bit more grim on a post-earnings call with analysts last week. Wal-Mart, which benefited from better sales during the start of the economic slump as consumers turned to discount merchandise, said its U.S. sales fell during the holidays even as other retailers saw signs of a slow recovery.
The decline in U.S. sales during the fourth quarter at the world’s largest retailer, which collects roughly $1 out of every $10 spent at stores in America, was accompanied by a company warning that soft sales would persist through April. Same-store sales at Target rose 0.6 percent for the holiday quarter.
Still, discounter Wal-Mart has had the luxury of getting the jump on Target by moving more aggressively on its remodels while business fared generally well during the recession.
Target will have to keep improving the quality of its private-label consumables and properly merchandise the private-brand apparel and home goods it has already been improving, said Brian Sozzi, retail analyst at Wall Street Strategies. “When I go in I already see better-than-before quality merchandise in the home area,” Sozzi said.
Target is already taking action. Its newspaper circular two weeks ago carried on its cover pictures of name-brand products alongside its own Up & Up brand, with costs for both, and its merchandise having much lower prices. This week’s circular was solely Up & Up products, with the tag saying “save more and more…”
“Target is now in a better position being less of a discounter with the prospect that some consumers are beginning to be a little less conservative with their money,” said David Abella, money manager at Rochdale Investment Management, which holds shares of Target and Wal-Mart.
Wal-Mart may also be running into something of a wall, with those customers who have the lowest of incomes really sapped by the recession at this point, Abella said.
Target may also be well-positioned because consumers are not ready to take a bigger step up to a store like mid-tier Macy’s Inc.
“We remain cautious on Macy’s earnings potential,” said Michael Exstein, retail analyst at Credit Suisse. “Macy’s will increasingly need to depend on its merchandising or market-share shifts to improve top-line.”
