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The Target Squeeze: Chain Battles Foes From Above and Below

NEW YORK — Unfortunately for Target Corp., discretion is not the greatest part of value.With Wal-Mart Stores carrying the day on price and...

This squeeze may force Target to inject more fashion risk as the "chic" discounter continues its expansion.

Some of the blame for tepid holiday sales can be placed on tough comparisons with last year, when comps rose 13.5 percent in November and 1.8 percent in December. Analysts have also suggested that the firm simply planned too aggressively and failed to effectively communicate the shortfall’s reasons to Wall Street. More blame can be piled on an uncooperative shopping environment.

Salomon Smith Barney analyst Deborah Weinswig pointed to product mix as an important factor in Target’s sales relative to other retailers. Forty-three percent of sales at Wal-Mart are consumables, or items sold at supermarkets, she said, as opposed to just 20 percent at Target.

"They’re having a traffic problem because you’re not going to go there for consumables because you know you’re going to pay less at Wal-Mart." Likewise, she said, "if you want inexpensive apparel, you’ll go to Penney’s or Kohl’s." Penney’s and Kohl’s comped up 4.7 and 3.3 percent, respectively, in December.

She added, however, that Target’s gross margins benefit from an extensive private label program that produces a high percentage of its own apparel. Industry estimates place Target’s private label penetration at around 75 to 80 percent of its total.

"Whether by choice or by force, they are heading more and more toward being a designer discount store," said Weinswig. "They’re making a huge push for labels that are only carried at Target. The story here is their growing dependence on exclusive designers and the risk could be a fashion miss."

J.P. Morgan Chase & Co. analyst Shari Schwartzman Eberts noted: "Target drives traffic into the stores through its differentiation. In an environment where the consumer is not looking for the next hot item, they’re always going to suffer."

Target’s designer focus does make it more vulnerable to fashion hits and misses, noted Eberts, although the analyst doesn’t see the firm changing its strategy or losing its way. "It seems as if their niche is shrinking a bit, making it harder for them to differentiate themselves and maybe that’s why they’ve been intensifying their designer focus."
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