Target Passes Increases to Consumers

Minneapolis — The price increases Target Stores is accepting from many of its suppliers, particularly in food, are being passed along to consumers successfully for the most part, the retailer said during its third-quarter earnings call last week.

“We have received numerous price increases throughout the year, and they continue to come our way in things like food,” explained Gregg Steinhafel, president. “As we receive those price increases, we look to pass those on in the marketplace. We pull our prices up to be reflective of what those increases are, and oftentimes those price increases stick, but sometimes they don't. It's based on an item-by-item, month-by-month basis.”

Steinhafel said Target tries to maintain its margin rates by passing on these price increases. Aside from food, Target also has begun accepting price hikes for “a lot of resin-based products” related to raw material price increase as well as products affected by higher transportation costs.

“On average (price increases) have been passed through and consumers have responded,” he added. “If it is a big price increase in the range of 10 to 12 percent, it might take a consumer longer than something with a 5 percent increase.”

Responding to analysts' concerns about the home department's lagging performance, compared with the total company, Steinhafel said he expects shoppers' response to the new Thomas O'Brien collection will resemble that of Fieldcrest.

“(The Thomas O'Brien collection) has been a little slow out of the box, but we expect in time the guests will come in, evaluate it, learn about it just like they did with Fieldcrest, and examine when will be the right time for them to re-outfit their bedroom or bathroom,” Steinhafel said. “We know it will gain momentum.”

Inventory levels were reported to be in a strong position, even as the company continues stepping up its direct importing activity. Right now, 25 to 30 percent of Target's total purchases are directly imported.

“In the short run I think the direct import issue will likely cause our inventory to grow for a while in line with, or slightly ahead of, sales,” said Douglas Scovanner, executive vice president and chief financial officer. “We strive to improve our inventory turn. We have a pretty strong track record in that over a long period of time.”

On the subject of quotas on Chinese textiles, Steinhafel said the company is well-versed on the matter and well-positioned. “Less than 50 percent of our internally designed and developed direct imports are from China today, and over 50 percent of our direct imports through importers are from direct import partners. We've got a balanced portfolio of sourcing alternatives and so we really don't see a meaningful change to our strategy or gross margin rate or supply chain initiative.”

Looking to the holiday season ahead, Target is expecting to participate, “as always,” Steinhafel said, in a “highly promotional and very competitive,” period.

The retailer's strategy is to build on a “Gather Round” theme focused on entertaining, gift giving and decorating.

Food will play an integral role in this year's lineup again. At SuperTarget, shoppers will be offered — as they were last holiday — a complete six-serving turkey or ham dinner with trimmings and choice of pie for dessert. There will also be a broad assortment of custom and pre-packaged gift baskets.

Target will offer an exclusive selection of tabletop items, including dinnerware, glassware and decorative accessories as well as holiday lights and trims.

The retailer expects consumer electronics, toys and gift cards to be strong category components of the season.

During the third quarter, the three major hurricanes that affected the country — Katrina, Rita and Wilma — also negatively impacted Target, Scovanner explained. “To quantify our hurricane uninsured casualty loses, damages to our facilities and inventory losses ran in the range of $20 million, approaching 20 basis points,” he said.

In real estate, Target hit a milestone during the quarter. It opened 59 stores, marking “the largest cycle in our history,” Steinhafel said.