How Target stumbled with customers

A series of recent stumbles at Target Corp. has some retail experts questioning whether the cheap-chic discounter is losing its cachet.The chain that made it trendy to shop for low-priced designer clothing and mod lamps while picking up detergent and toothpaste has been struggling to gain back its pre-recession sales strength.
Target shoppers are stocking up on toilet paper and foodstuffs, but the stores are having a hard time enticing customers to spend money on stylish clothing and home goods—which are more profitable and make up more than 40% of annual sales. It was these apparel and decorating items—mixing mass with class—that set Target apart and allowed it to be one of the few discount chains to thrive against Wal-Mart Stores Inc.'s relentlessly low prices.
For the fiscal first quarter, the Minneapolis-based retailer notched just a 2% gain in same-store sales, or sales at stores open at least a year, falling short of analysts' expectations for a gain of 3% to 4%. Last Thursday it reported its May sales rose 2.8%, at the low end of its guidance.
Target shares are trading near a 52-week low, having fallen 22% from a year ago. On Tuesday, the stock closed at $47.06 at 4 p.m. on the New York Stock Exchange.
When Target holds its annual meeting Wednesday in Pittsburgh, executives will likely blame a year of lackluster results on the fragile economic recovery. "Our guests continue to shop cautiously," Target Chief Executive Gregg Steinhafel said last week, echoing his earlier sentiments. "We believe these households need to see further improvements in housing and income growth before they'll meaningfully increase their discretionary spending."
But some retail analysts and experts think Target may be suffering from other problems beyond the uneven economic recovery. Adrianne Shapira, retail analyst at Goldman Sachs, said Target has confused its shoppers by emphasizing food and low prices at the expense of its cool image. In 2009, in the depths of the recession, Target began adding fresh and expanded refrigerated foods to most of its 1,750 stores. To boost loyalty, last year it began rolling out a 5% across-the-board discount for customers using its Target-branded credit and debit cards.
These were good moves during the recession, but the pendulum may have swung too far, attracting more medium- and low-income shoppers at the expense of the higher-end shopper. While food can drive shopping trips, profit margins are slim.
Expressing concern that Target has become too much of a moving target for consumers, Ms. Shapira said, "It is as if they have fallen off people's shopping list for discretionary products."
Tommy Yanez, a Corpus Christi, Texas, hairdresser, said he paid off his Target credit card three months ago and hasn't been back since. "The home stuff is good looking but you can find it other places now, too," said Mr. Yanez. "Target's 5% discount is nice, but it is not as good as Kohl's 20% off coupons."
Target counters that it remains committed to its "Expect More, Pay Less" slogan and that it "continues to generate excitement" with its in-house brands such as Merona and its designer partnerships, such as the Missoni for Target collection coming in September.
Even now Target has a higher income base than Wal-Mart, with the median Target household earning $60,000 a year. In its high-flying days, analysts considered Target's retail peers to be the department stores and off-mall retailers like Bed Bath & Beyond Inc. When the recession hit, Wal-Mart and the dollar stores sales grew while Target and most of its peers were hammered.
In the past year, middle and upper-end retailers bounced back while Target lagged behind. "Macy's is winning in apparel and Bed Bath & Beyond has picked up a lot of market share," said Ms. Shapira. Home furnishings are "doing very poorly at Target. In a world that no longer has Linens 'N Things, you would think Target would have picked up some market share." (Linens 'N Things closed its stores in 2008 but exists online.)
Some of Target's struggles may also owe to the changing competitive landscape. Kohl's Corp. and J.C. Penney Co. in recent years have taken a page from the Target playbook, adding low-price designer clothes from Vera Wang, Ralph Lauren and others.
"Remember, when Target had the most success in apparel, the department stores were still figuring things out and were in disarray," said Brian Sozzi, retail analyst at Wall Street Strategies.