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Target’s future rests on getting fundamentals right

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NEW YORK — Having made a number of dramatic moves in the past year, from winding down its operations in Canada to selling its pharmacy business to CVS Health, Target Corp. is now focused on the elements needed to support ongoing growth.

“Our future depends on getting the fundamentals right,” Target chairman and chief executive officer Brian Cornell said during his company’s recent meeting with the investment community. “And that means modernizing the supply chain. It means enhancing our technology, taking complexity out of our systems, elevating the use of data and driving productivity savings across the entire business.”

With that in mind, Target is increasing its capital spending from $1.4 billion in the fiscal year that ended in January to $1.8 billion in the current fiscal year, and up to $2.5 billion next year. Much of that spending will be devoted to behind-the-scenes improvements to the company’s systems. But the retailer is also testing improvements to the store environment aimed at enhancing the experience of its shoppers, known within the company as guests. Many such enhancements are being tested in a pilot program called LA25.

“This spring, we are taking 50 of our top enhancements that we’ve been testing across the country and putting them together in 25 stores in Los Angeles,” Cornell said. “The goal is to see how we can improve the guest experience and grow sales when all of these elements are working together.

“We are making product improvements the hero with more impactful presentations, fixtures and signage. We will make it easy for the guest to pick up online orders with dedicated service stations. Guests will see a floor pad filled with reinventions across the store.”

Target is also adding new stores, with 12 outlets scheduled to open this year. Most are smaller outlets located in urban neighborhoods or college communities. But new stores are not at the center of the retailers growth strategy.

“Not that long ago, growth in retail meant adding a lot of stores,” executive vice president and chief financial officer Cathy Smith told analysts. “Today, our growth plans are focused on using the assets we have differently. And at Target, we are fortunate to have many great assets to build upon.

“We have one of the strongest brands in the world and a unique relationship with our guests. We have 1,800 well-located, well-maintained stores that are fun to shop. We have a guest-focused team both at headquarters and in our stores that differentiates us from all other companies, not just retailers. Our product design, development, sourcing organization keeps us ahead of the trends and allows us to offer beautifully designed, innovative and fashionable merchandise at an amazing value. And we have built an impressive array of owned and exclusive brands, many of them $1 billion brands that our guests love and trust. Target has an enviable set of assets, and our growth plans today are focused on using all that is Target to serve our guests in new ways and more reliably.”

Cornell said one of Target’s priorities this year will be to continue to implement clear category roles. He compared the approach to playing golf with a set of different clubs, each of which has a different role.

“We look at our merchandising categories the same way,” he explained. “We will never be famous for selling bottled water or laundry soap, but we’ve got to have the right brands, the right pack size, and we have to always be in stock, because we know these items are key, they are essential to that Target run.

“But we also know there are four categories, categories we’ve deemed signature businesses, where our guests want us to play and inspire them — style, baby, kids and wellness. They represent about a third of our business, and we are putting significant resources behind them.”

Those signature businesses grew three times faster than the rest of Target’s assortment in 2015, Cornell said, and the company expects strong growth in those categories going forward.

Another priority is upgrading Target’s grocery departments, which already generate about $18 billion in sales.

This year, Target will call consumers’ attention to its organics offering and to dramatically improving freshness across the assortment. The retailer has relaunched its Market Pantry brand, and has brought in external talent from the supermarket industry to help it rethink issues associated with assortment, pricing, promotion and presentation.

“We know, given where we are starting, given where we are today, that we’ve got lots of room for growth,” Cornell said. “And while this won’t start with a big, onetime reset, or a one, big-time reveal, we think that we will transform virtually every element of the business.”


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