Continued: Trying to lure customers back, sooner

Shoppers such as Sher Trombley have been giving Target fits for months.

She's making lists and trying mightily to stick to them. Spring clothes? That's the type of impulse buy she's trying to avoid.

She makes two trips a month to a Target, but added that she's "just trying to stay out of stores these days."

Since before Christmas, Minneapolis-based Target Corp. has reported that, while people such as Trombley may be spending more money at their stores, they're not coming in to shop as often.

Conventional wisdom in recent years has been that Target's higher-end customers were more insulated from rising fuel and food prices than those at rival Wal-Mart Stores Inc. Target's designer names such as Isaac Mizrahi and Michael Graves drew in shoppers because of their trendy looks and affordable prices.

But the tide may have turned. Target, which has struggled with flat and declining sales in recent months, releases quarterly results Tuesday, and the Minneapolis-based retailer faces the possibility of worse same-store sales results than Wal-Mart for the first time in 12 consecutive quarters. Wal-Mart posted a better-than-expected fourth-quarter profit gain of 4 percent last week, with same-store sales -- a key barometer of a retailer's health -- rising 1 percent, as penny-pinchers searched for deals.

Share prices have reversed as well, with Wal-Mart climbing while Target is brushing 18-month lows.

"Target is suffering from a bit of a positioning problem in consumers' minds right now," said Stan Pohmer, a Twin Cities retail consultant. "They've been focused on setting fashion trends, which has served them well and differentiated them from competitors. But Wal-Mart's out there screaming price. In a tough economy, Target has to let consumers know they're price-competitive, when that's what consumers are focused on."

Target is also more vulnerable to shaky consumer confidence, because 41 percent of its sales come from two higher-margin categories currently taking the biggest hit: apparel and home furnishings.

Target's credit-card operations also are feeling some blow-back, as rising food and fuel costs, a slumping housing market and a tight job environment push consumers to the edge.

Citi Investment Research analyst Deborah Weinswig slapped a "sell" rating on Target stock last week, partly because of concerns about rising delinquencies and increased charge-offs from unpaid accounts.

Delinquencies, which totaled $518 million, are up 46 percent from a year ago.

"We have long questioned how the Target portfolio would perform in a slowdown -- and it appears the answer is, 'poorly,'" analyst William Ryan of Portales Partners wrote in a research report last week after the portfolio's monthly results were released.

The deteriorating credit card operations poses another problem for the retailer as well. It announced in September that it was shopping the portfolio for a possible sale, but tight credit markets and the increasingly risky numbers make the timing poor. Target had planned to decide what to do with its $8.7 billion portfolio before the end of the year, but pushed the decision into the first quarter.

Using gift cards for food

Reversing course during the toughest retail environment in years may not be easy. In a sign of the times, consumers used holiday gift cards to buy necessities such as food, diapers and laundry detergent, instead of video games and MP3 players.

To date, Target isn't resorting to extra sizzle to get consumers back through the double doors more often. Target.com is pushing $5 off $50 orders and free shipping on some furniture, and recent newspaper circulars offered free gift cards with the purchases of a number of different products.

Target officials say the company is taking the long view, that it'll ride out the business cycle with the same plan that brought it success in recent years: selling innovative merchandise with distinctive designs at affordable prices.

"We're not making any drastic changes, but we don't have our heads in the sand either," Target spokeswoman Lena Michaud said. "There isn't a magic bullet or button we can push that all of a sudden will generate traffic in our stores. We're doing things behind the scenes that'll help us perform better, but not have an impact on our customers."

For example, Target is trying to control expenses, while not resorting to layoffs, as Macy's, Ann Taylor, J.C. Penney and others have done, she said. And while Wal-Mart has pared expansion plans to focus on rebuilding its U.S. markets, Target plans to move forward with opening 100 new stores this year, Michaud said.

For some analysts, that might not be enough.

"We need to see some newness with Target, especially in the apparel side right now," said Lauri Brunner, an analyst with Thrivent Investment Management in Minneapolis.

About the time that Target announced it was ending its five-year relationship with Mizrahi, Wal-Mart announced it landed an exclusive for Hannah Montana clothes and jewelry.

Brunner said Target has taken to pushing oversize bulk-packaged items such as diapers and soft drinks on the end of its shopping aisles, a move that's intended to seem more "Costco-like," Brunner said.

But occasionally it backfires.

"While Target does a great job of merchandising, Wal-Mart's doing a better job of keeping up its in-stock levels," Brunner said. "Especially in this kind of environment, consumers don't want to miss a sale if diapers are $11 a pack. If I go to your store and you don't have them, I leave mad."

Part of Target's success in this economic downtown will depend on its ability to convince consumers that it can compete with Wal-Mart, Sam's Club and Costco on price.

Although Target matches prices with competitors, a whopping 87 percent of consumers surveyed recently by Citi Investment Research believe that Wal-Mart has lower prices. The survey also found 57 percent of respondents shopped at Target once a month, while 45 percent shopped at Wal-Mart three or more times a month.

Same price, different message

"The reality is that Target's consumable price points are within pennies of Wal-Mart, but you don't get that message," Pohmer said. "I don't think they need to get off the trend-in-fashion bandwagon. But they need to be communicating more effectively their price value to the consumer."

Yolanta Retana fits that bill. Shopping recently with her 2-year-old son, Jonathan, Retana scoured Target for deals, and jumped on the 75 percent-off Valentine's Day sale.

"If I find something at a good price, I'll buy it," said Retana, of Richfield, who works full time assembling hearing aids. "I'll go someplace else if prices are better."

Jackie Crosby • 612-673-7335