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Target's Bulls-Eye: Profit from Cautious Consumers

Target executives valiantly tried to set an optimistic tone on a recent earnings call, but they also hedged just about every bit of optimism with judicious waffling.

Take CEO Gregg Steinhafel, who said in the call, as transcribed by SeekingAlpha:

We expect economic recovery to continue in 2010, but we expect progress to remain slow as consumers face historically high rates of unemployment and lack of access to consumer credit. Against the backdrop of the external environment, we are confident that Target is in a very strong position. Our broad assortment of need-based food and commodity items helped us weather the downturn, and as the economy recovers, our unique combination of high-quality, affordably-priced home and apparel merchandise is perfectly aligned with today's more frugal consumer mindset.
Steinhafel basically is saying that Target is better prepared to serve a consumer that doesn't want to spend money, much like WalMart. And with talk of "today's more frugal consumer, " Target is even starting to sound like Walmart.

Target is forecasting that comparable store sales will improve by two to four percent; even if they do, the company concedes, that will not make up for recent declines. In the last fiscal year, comps were down two-and-a-half percent, and three percent the year before.

The remarks from Kathy Tesija, executive vice president of merchandising, reinforced the grind-it-out theme. She noted that when Target lowered prices a lot, people bought more stuff. That's not a ringing endorsement of consumer enthusiasm.

Target did not have a bad quarter. Indeed, the company enjoyed its first comparable store sales gain of the year, up a bit less then one percent. Earnings rose 54 percent, to $936 million.

Inventory is up, too, which usually is a sign of confidence in sales prospects, but Steinhafel pointed out that the increase left levels below 2007. Even here, Target is planning less for a rising consumer tide than occasional rogue waves of opportunity. Tesija related:

Disciplined inventory control was a key factor in our strong fourth-quarter gross margin and profitability. In 2010, we'll continue to exercise discipline in our buying decisions while creating contingency plans that will allow us to chase stronger-than-expected sales trends in our discretionary categories when they emerge.
Tesija referred to the strength of the home business, but when asked to clarify, all she would say was that Target "definitely" saw it turning a corner. She noted that the new cookware from Giada De Laurentiis and outdoor products from newly acquired Smith & Hawken were doing well but weren't blowing away forecasts. She also said that Room Essentials, an opening price line that Target has relaunched is "building a lot of momentum." But that's faint praise from the usually enthusiastic Tesija.

Target's conference call came on the same day consumer confidence numbers came out, which seemed like poor timing. Target execs talked up consumer confidence and the positive effect that has had on spending in discretionary categories such as apparel and home. But then the Conference Board reported that consumer confidence took a big step back last month.

Asked about how Target's own research compared to the newly released numbers, Tesija tried to split the difference:

What I will tell you is, we've been talking to our guests over the past 18 months, and we have clearly seen her describe her feelings going from a place of fear -- How am I going to manage? -- to a place of pride and confidence that she has weathered that stormed and has been able to make her budget work and now is selectively starting to come a bit more often and to spend a bit more money in some of the discretionary categories.
As Tesija describes it, consumers are confident that things won't get worse, which is a lot different than being confident that things will get better. Coaxing additional cash from consumers will be tough, but Target is testing a credit card initiative in Kansas City that flat out gives users a five percent discount on every item the retailer carries that is paid for with the card. As this initiative suggests, Target is willing to pay a price to extend a lifeline to the consumer.

There's optimism in that, but a good bit of anxiety, too.