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Refining the Mass Formula: Target Speeds Growth Via the Mall

Target has shed Mervyn's and Marshall Field's, rethought its consumables strategy to focus on Super Targets and is fine-tuning its real estate plan.

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NEW YORK — Target Corp. might have found its sweet spot: the mall.

As Federated Department Stores Inc. looks to shed 75 overlapping stores following its acquisition of May Department Stores Co., which closed Tuesday, mall owners could turn to Target to fill those vacant spaces.

Although Target has been in malls since the Seventies, the timing is right for such a move. The retailer has shed Mervyn's and Marshall Field's and is outperforming the competition in terms of hipness and marketing prowess. And thanks to hefty, annual redevelopment spending, stores have caught up with savvy marketing techniques. The retailer is also delivering robust profit growth.

The $47 billion mass merchant is uniquely placed between the $285 billion Wal-Mart Stores Inc. and the $30 billion Federated in terms of revenues, but also market share and target demographics. In sales terms, Target's closest rival is Sears Holdings Corp. with $55 billion in revenue, but analysts don't consider Sears Holdings a strong, direct competitor to Target because its sales are divided between Sears and Kmart nameplates.

Target already bears the marks of success — it has roughly doubled its pretax earnings, diluted earnings per share and revenues over the past six years. Today it will announce same-store sales for August. Comps in its discount stores are expected — for the 19th consecutive month — to outpace those of its biggest competitor, the goliath from Arkansas. Target and Wal-Mart did not return calls seeking comment.

But even though it has the funds for a fast expansion play (as of July 30, Target had $696 million in cash and cash equivalents on its balance sheet, while cash flows totaled $1.6 billion), it is not aggressively adding stores or going global with its retail platform. In fact, the sprawling retail stores of Target might soon be relics. Although the majority of its stores are still stand-alone, much of the future growth potential will be in unlikely real estate: enclosed malls.

"The same people that shop at Neiman Marcus shop at Target," explained Peter Lowy, managing director of Westfield Group, which has seven Targets in its U.S. portfolio and is building two more. "There's no reason why they shouldn't be in malls."
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