United States-Supermarkets go Head to Head.

UNITED STATES-SUPERMARKETS GO HEAD TO HEAD.

Target plans to place greater emphasis on food, health-care products, personal items and other necessities, while offering fewer discretionary items to avoid big markdowns that have hobbled its earnings.

Target executives laid out plans for the new strategy during a conference call with analysts after posting a 41% drop in fourth-quarter net income on weak sales and a withered credit-card operation.

"We plan to further enhance our assortment of dry, dairy and frozen [food products], and add perishable items in new and remodeled general-merchandise stores," President and Chief Executive Gregg Steinhafel said.

Target is also investing in technology to improve different areas of its operations, such as its pharmacy program, and plans an aggressive drive to emphasize low prices.

The retailer plans to design the majority of its new and remodeled stores in a way that draws attention to fresh foods and other consumables.

The moves are necessary "to improve sales, capture market share and increase profitability in this challenging economic environment," CEO Steinhafel said. "We seek to make Target a preferred shopping destination for our guests."

Target will play up its private-label goods "to make a more powerful statement about these exclusive high-quality affordable assortments," Steinhafel said.

Target is making "significant investments" in its perishable food-distribution capabilities, "reflecting our growing commitment to food," Steinhafel added.

The company’s game plan is very similar to the one Wal-Mart has followed for years, placing a greater emphasis on prices and carrying more consumables that, while often featuring lower margins than apparel, can prove profitable because of volume. (Wal-Mart also said during a conference call last week to discuss its earnings that it has big plans for its own private-label food line.)

"Economic conditions have created a fundamental shift in shopping behavior as consumers seek ways to stretch their dollars and pull back on their purchases of discretionary items," said Kathee Tesija, Target’s executive vice president of merchandising.

In its new and remodeled stores, Target will allocate more shelf space to non-discretionary categories and try to leverage its advertising and promotions "to drive awareness of this merchandise," Tesija said.

Target also plans an aggressive assault on Wal-Mart through advertisements and promotions.

"In today’s economy, [customers] won’t come to us for their everyday necessities if those necessities aren’t priced right" and "perceptions do not reflect the reality" that Target’s prices on identical items are very close to those of Wal-Mart, Tesija said. "To boldly and accurately convey our value message, we have redesigned our [advertising] circular" to allow large photos of featured items and headlines that emphasize their pricing.

Target is also expanding its private-label offerings to generate more trips to its stores, increase sales and profitability, Tesija said. "This spring, we’ll relaunch two of our own brands to more clearly communicate their value."

Right now, Target is "between a rock and a hard place," said David Abella, a portfolio manager at Rochdale Investment Management whose firm holds a small amount of Target shares. "They have to do something because of the economy" and because Wal-Mart is doing so well. Wal-Mart has posted higher same-store sales than Target for 14 consecutive months, with Wal-Mart always showing growth in the period while Target’s sales fell in 11 of those months.

But Target also has to be careful in its approach. "They could become more like Wal-Mart, to their benefit," Abella said. "But they cannot become too much like Wal-Mart because that would jeopardize their higher-end image."

Target is getting hit on two operational fronts, analysts say. Its product offerings feature a larger share of discretionary merchandise than rivals such as Wal-Mart and the slowdown in consumer spending in its retail segment is proving formidable

At the same time, Target is one of the last retailers to own its own credit-card operation (though JPMorgan Chase & Co. (JPM) now holds a bit less than half of the operation) and customers are falling short on paying their bills.

"The weight on Target’s business from what many have coined a nightmarish holiday quarter was on full display in both of its business segments," said Brian Sozzi, equity research analyst at Wall Street Strategies.

Target reported fourth-quarter net income of $609 million, or 81 cents a share, down from $1.03 billion, or $1.23 a share, a year earlier. Earlier this month, Target warned that fourth-quarter earnings would be below analysts’ then-view of 86 cents a share. Revenue fell 1.6% to $19.56 billion.

Target’s retail segment, which doesn’t include its credit-card segment, posted a 23% drop in earnings.

Target’s showing reflected negative trends in both average ticket and transaction value, Sozzi said.