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TARGET SETS ITS SIGHTS ON IMPROVING HOME.

Byline: Barbara Thau, Jack Whitsett, Rusty Williamson, Robert Sharoff

MINNEAPOLIS-The home business at Target Stores is tracking below the retailer's growth rate this year. And while the upscale discounter is the steam engine of Target Corp., the company will deliver "milestone" news about the future of its ailing Marshall Field's and Mervyn's chains in the next 60 to 90 days, including a possible sale of the divisions.

That's some of the news that emerged during the retailer's annual meeting here last Wednesday.

Executives also said the retailer is committed to doubling its mix of direct imports and leveraging reverse auctions and competitive line reviews -- its controversial buying practices -- to drive cost efficiencies and compete better with the behemoth of Bentonville: Wal-Mart. "I wish Wal-Mart didn't exist," said Robert Ulrich, chairman and chief executive officer of Target Corp.

And like that retail giant, Target plans to make its international debut in the future, he said.

Recapping the home business, Gregg Steinhafel, president of Target Stores, said "it's performing slightly less than we'd like."

While furniture is "on fire," small appliances and floor care are sluggish, due to "lack of newness and excitement." Performance of the once red-hot George Foreman grill, for example, "is off."

By contrast, the exclusive Shabby Chic home textiles collection "is spectacular," and will expand into home decor, gifts, frames and mirrors. The proprietary Swell home collection is "doing fine," as is the new Bella home textiles line.

To boost total home sales, Target will "get more aggressive on pricing" and tweak the mix as part of the normal course of business, but every year can't be a great year for home, Steinhafel said. "Last year was a great year in home; the year before that was another great year."

In 2003, Target generated 86 percent of the company's total revenues, which grew 9.7 percent to $46.7 billion from the prior-year period.

The company recorded $3.5 billion in pretax profit, with the discounter accounting for more than 90 percent of that profit.

By contrast, the 266-unit Mervyn's promotional discount store chain and Marshall Field's, the tony department store with 62 stores, "will contribute only about 3 percent of profits by 2007," Ulrich said, a "telling" forecast that, along with "shareholder urging," prompted the company to explore divesting the business.

Still, "we believe both companies are valuable as ongoing operations," said Ulrich, who notes that the company has been in discussions with potential buyers.

Federated Department Stores revealed recently that it expressed interest in Marshall Field's.

The retailer plans to double its mix of direct imports from over 15 percent of the business today to 30 percent over time. By leveraging AMC, Target's sourcing arm, and its own design team, "it cuts out the middle man," Steinhafel said.

Although some suppliers have taken issue with Target's use of electronic sourcing techniques, such as reverse auctions and competitive line reviews, they are here to stay, executives said. "Our goal is to get the best price in the marketplace," Ulrich said. "We're competing with the world's largest company." Those cost savings can then be passed along to shoppers.

Steinhafel described reverse auctions as a "fair and reasonable process. We've maintained great relationships with our 5,000 vendors."

The process enables vendors to "earn" the business, as opposed to "having an entitlement" to the business. What's more, it opens the door to new vendors.

On the expansion front, "there is no question we'll be international some day," Ulrich said, citing Canada and Mexico as potential markets.

But for now, the domestic market remains a growth opportunity. "In the next 8 to 10 years, we have the ability to double the number of stores and triple the square footage in the U.S."

The 1,249-unit chain will open 95 units this year, and despite steep real estate costs, urban markets are another growth opportunity.

Dillard's

LITTLE ROCK, Ark.-Dillard's Inc.'s traditionally brief annual meeting passed May 15 with little mention of the home department as William Dillard II, chief executive officer, outlined changes in other areas, including a youth movement in women's and a switch to open-air locations.

"Home's a pretty stable business," Dillard said in answer to a question after the meeting, adding that few changes were in the works. He also denied that the company might be sold.

Sale talk had "no credibility," Dillard said. "That was in the context of Field's being sold," he said, dismissing the possibility that the company founded in the 1930s by his father and run by the family ever since might be on the block. An industry analyst for the A.G. Edwards firm in St. Louis had mentioned the possibility in connection with recent sale negotiations for the venerable Marshall Field's chain, owned by Target Corp.

Dillard, upbeat after the company's income and sales improvements in the first quarter, spoke for only about five minutes at the meeting, held at the department chain's headquarters in Little Rock

"It's the best quarter we've had in a long time," he said. "We're really very pleased."

The company reported sales up 2 percent in the most recent quarter from the same period last year, while net income soared to $53.8 million, or 69 cents per share, up from $24.3 million, or 24 cents per share in 2003. In contrast, the fiscal year ended Jan. 31 was another in a series of bad years for Dillard's, with sales down 4 percent. Income for the year dropped to $9.3 million from $131.9 million in 2002, though an accounting change resulted in a net loss of almost $400 million in 2002.

The home department dropped 4.3 percent in 2003 on top of a 3.6 percent drop in the previous year. But while Dillard stressed changes in the women's department toward higher-quality, more "fashion-forward"merchandise, major home changes, if any are planned this year, are being kept under wraps.

The company will continue a trend toward store branding, Dillard said. The chain reached 20.9 percent private-label penetration as a percentage of total sales in 2003, up from 18.2 percent in 2002.

Dillard's is also building in open-air malls for the first time since the mid-1960s, he said. Open-air centers feature more restaurants and shops, he added.

"Of the five stores we opened last year, two were in open-air malls," Dillard said. "It's changing our industry a lot."

Jack Whitsett

J.C. Penney

PLANO, Texas-J.C. Penney Co. isn't interested in purchasing Mervyn's stores, said Allen Questrom, chairman and chief executive officer of the retailer, at the company's annual shareholders' meeting here recently.

The $17.7 billion retail chain could easily make a move on Mervyn's, the promotional department store that parent company Target might sell, considering that it's soon to be flush with an extra $3.5 billion from the disposal of the limping Eckerd Drugstore chain to the Jean Coutu Group and CVS Corp.

But instead, the 1,020-unit chain plans to take a more introspective approach and focus on strengthening its store, catalog and Internet divisions with trendier and more compelling merchandise and expanding its reach by opening up to 100 stores over the next few years, including at least seven of the smaller but highly lucrative freestanding stores by year's end.

J.C. Penney finished 2003 with a comparable-store sales gain of about 1 percent and is planning to finish 2004 with increases of 2 percent to 3 percent, the third straight year of comp-store sales gains. Operating profits grew 13 percent in 2003 as a result of gross margin improvements from better execution in a centralized environment. Centralization is one of the cornerstones of Penney's five-year turnaround plan.

Currently, home, women's apparel, accessories, fine jewelry and men's are among the best-selling categories. The chain's new Chris Madden Turning Home into Haven line for the J.C. Penney Home collection launched two weeks ago and is off to an auspicious start with sales above plan and lots of positive consumer buzz, according to Vanessa Castagna, chairman and chief executive offer of J.C. Penney stores, catalog and Internet, and executive vice president of J.C. Penney Co.

The company will launch a new wedding registry in September in a partnership with Colin Cowie, the prominent wedding planner with a celebrity following.

Penney's revitalized catalog and Internet divisions continue to surge with a 3 percent to 4 percent rise in sales forecast by the end of the year. Internet sales hit almost $600 million in 2003 and are on track to reach $1 billion by 2006.

"Merchandise assortments, which are a blend of J.C. Penney private brands and destination national brands, are more fashionable and trend-right," Questrom said. "We are promoting J.C. Penney as America's year-round gift headquarters and now feature prominent gift-giving merchandise statements throughout the store, throughout the year, and have strengthened our already dominant position in merchandise basics such as towels, jeans and underwear through improvements in distribution, expanded sizes and depth of stock on key sizes."

"Have You Seen What's Inside at J.C. Penney?" is the company's new advertising and marketing tag line, an evolution of its long-running "It's All Inside" campaign. Penney's advertising budget increased more than 10 percent last year as it makes a concerted push to score with its target demographic: 80 percent of its shoppers are women between the ages of 30 and 60.

Rusty Williamson

Sears

HOFFMAN ESTATES, Ill.-While conceding that the home fashions business has not been easy in the last year at Sears, Alan Lacy, chief executive officer, said the retailer is moving ahead with several initiatives designed to spark sales of the category, from new merchandise programs to changes in the way Sears stocks and displays home products.

He also said Sears Grand, the new off-the-mall format, will be the retailer's key growth vehicle.

Lacy's comments came at the company's annual meeting, which was held on May 13 at Sears headquarters here.

On the home merchandise side, Lacy mentioned a major new towel program that involves more than tripling the number of colors, from 27 to 96.

On the display side, Lacy said Sears is moving to a self-serve approach with merchandise that is easily accessible. "In housewares," he said, "shopability is very important."

Lacy said the retailer is installing new bed and bath fixtures in more than 400 stores.

He also mentioned that Sears is back in the mattress business in a major way with merchandise in about 400 stores.

Sears had total sales last year of $41.1 billion, down slightly from $41.3 billion in 2002. Earnings, however, more than doubled to $3.3 billion.

The big news for the company last year was the sale of its credit and financial products division to Citicorp for $22 billion, plus $10 billion in assumed debt. The sale allowed Sears to retire $21 billion in debt and begin a stock buyback program, thus significantly strengthening the bottom line.

The sale also created a company now totally focused on retail operations. Sears currently has 871 full-line stores averaging 91,000 square feet of selling space. Lacy said all the stores are profitable.

Comparable-store sales for the company as a whole, however, were down 2.7 percent last year.

As in previous years, Lacy noted that Sears is at a disadvantage when it comes to competing against discounters such as Target and Wal Mart because its cost structure -- due to the fact that most of Sears' stores are in malls -- is considerably higher.

For that reason, Lacy said Sears' main growth vehicle in the future will be Sears Grand, the off-mall format the company created this year. There are currently Sears Grand stores in Salt Lake City and in Gurnee, Ill. Three others -- in Las Vegas, Los Angeles and Austin, Texas -- are planned.

Lacy said the company has already decided the Sears Grand stores should be smaller -- 175,000 to 185,000 square feet -- than the 200,000 square feet originally planned. He also said the company continues to tinker with the look and the assortment of the stores. He declined to say, however, if a larger rollout is planned.

The company is hopeful that it will resume growth at its upscale Great Indoors format by the end of this year, Lacy said. The home specialty concept has generated strong sales of late, he added.

Lacy previously said the cost structure was too high for The Great Indoors.

Robert Sharoff
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Comment:TARGET SETS ITS SIGHTS ON IMPROVING HOME.
Author:Thau, Barbara; Whitsett, Jack; Williamson, Rusty; Sharoff, Robert
Publication:HFN The Weekly Newspaper for the Home Furnishing Network
Article Type:Industry Overview
Geographic Code:1USA
Date:May 24, 2004
Words:2079
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