Target’s five-step plan for success

Target is heavily promoting its REDcard Rewards program, which launched last fall.

MINNEAPOLIS — Target is poised to become an even more significant player in the world of health, wellness and beauty in the coming years, assuming the company can execute a range of initiatives designed to grow sales to $100 billion and double earnings per share to at least $8.

Those targets represent huge increases from last year’s sales of $67.4 billion and earnings of $4, but chairman, president and CEO Gregg Steinhafel believed the figures are attainable within six to seven years. Earlier this month at the company’s annual meeting, he laid out the roadmap of how the company plans to get there.

First, much of the increased sales volume is expected to be generated by the ongoing conversion of the company’s base of discount stores to a new format known as PFresh. The addition of fresh food and an expanded consumables offering is the primary point of difference with PFresh, but as long as Target is putting stores through the disruptive remodeling process, it is using the occasion to upgrade other key areas of the stores. The end result is a more compelling shopping experience and a product assortment that more broadly satisfies shoppers’ needs and increases the frequency of visit and average transaction size.

The PFresh program, coupled with an increased emphasis on beauty care and pharmacy, as evidenced by the company’s “Ask Us” pharmacy campaign, has driven sales results in the broad category the company defines as household essentials — pharmacy, beauty, personal care, baby care, cleaning and paper products — to account for 24% of the company’s annual sales, up from 22% two years ago.

Since the PFresh concept was developed in 2009, Target has been remodeling stores at a rapid pace, including 341 stores last year that gave it a year-end total of 462 stores in the PFresh format. The company’s plans call for another 350 units to be remodeled this year, and at the end of the first quarter, 98 of those remodels were completed. Now 550 of the company’s roughly 1,500 conventional discount stores have been converted, and additional conversions will take place in the coming years.

But before that happens, Target has a major relaunch planned for its e-commerce business later this year that includes a heavy emphasis on mobile. “Our new site will offer an integrated and engaging online shopping experience. It will also give us a powerful platform for future multichannel initiatives that are authentically Target and relevant to our guests’ lives,” Steinhafel told attendees at the annual meeting. “This will significantly strengthen our ability to deliver a simple, differentiated brand experience that guests can access anytime, anywhere via a variety of channels.”

Looking ahead to the following year, another growth initiative outlined by Steinhafel involves the opening of the first City Target stores in Seattle, Los Angeles, Chicago and San Francisco. These stores are expected to produce useful insights around urban operational challenges and desired product assortments prior to what is expected to be a more meaningful rate of expansion in subsequent years.

Simultaneous with the PFresh remodeling activity and the major online push, Target is counting on a program called REDcard Rewards to contribute to same-store sales growth. Launched last fall, the program offers an immediate 5% discount to shoppers who pay with a Target credit or debit card. It quickly has gained acceptance and now stands at about a 7% penetration rate — and it puts Target at price parity with Walmart.

The biggest boost to Target’s topline will occur in 2013 when the company opens its first stores in Canada. The retailer acquired 220 Zellers leases, and after some extensive remodeling work, is due to open between 100 and 150 locations in Canada in 2013.

Target, along with all other retailers, is dealing with some major short-term challenges related to the economy and consumers’ ability to spend. However, Steinhafel is convinced a commitment to the company’s “expect more, pay less” value proposition will see it through difficult times.

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