Target Considering Smaller Stores to Expand in Cities (Update2)

Nov. 18 (Bloomberg) -- Target Corp., the second-largest U.S. discount chain, is considering opening smaller-format stores to expand in cities.

The company is researching the option, Chairman and Chief Executive Officer Gregg Steinhafel said yesterday in an interview at Target’s Minneapolis headquarters, adding that the retailer has no definitive plans or sites for such stores.

“We know that consumers in dense urban areas love Target,” Steinhafel said. “We have to work harder at trying to get a smaller Target in those areas.”

Target plans to open more U.S. stores in metropolitan areas as well as remodel existing locations to add groceries and encourage more frequent visits. On its earnings call yesterday, the company said it’s planning for a “modest” decrease in fourth-quarter sales at stores open at least a year as shoppers continue to pare discretionary spending.

Tests at Target’s Atlantic Terminal store in Brooklyn and two or three other urban sites may help the retailer prepare for smaller formats, Steinhafel said. At those locations, Target pruned the number of items available by as much as 25 percent by cutting certain sizes and colors of products to ensure the stores are well-stocked, he said. Target’s general merchandise stores average 128,000 square feet.

Target fell 73 cents, or 1.5 percent, to $47.87 at 4:15 p.m. in New York Stock Exchange composite trading. The stock has climbed 39 percent this year, compared with a 45 percent gain for the 29-member Standard and Poor’s 500 Retailing Index.

New Stores

“They still have reasonable growth opportunities without getting into urban formats,” said Matt Arnold, an analyst at Edward Jones & Co. in Des Peres, Missouri, who recommends investors buy Target shares. “The next best dollar that they can invest is probably going to be in the building of the new stores” and adding groceries to more locations.

Target plans about 10 new stores next year, including its first in Manhattan. In 2011, Target anticipates more openings, with the exact number depending on whether it can find the right locations and returns, Chief Financial Officer Doug Scovanner said in the interview with Steinhafel yesterday.

“The constraint in 2011 and 2012 is the availability of suitable sites,” Scovanner said. Ideally, the company would develop more than 100 stores annually as it had in recent years, he said. “We have the capital to be able to do that and we have the appetite to do that, but the availability’s not there.”

Finding Locations

With new development waning and potential retail partners pulling back, finding space is more difficult, Steinhafel said.

“We can’t go into these locations and do it alone and make the economics work,” Steinhafel said.

Target isn’t limited to building or renovating retail space, Steinhafel said. The retailer may consider former industrial sites, auto dealerships or demolished shopping mall grounds, he said. The company converted the site of a former Twinkie factory for one store, Scovanner said.

Target said yesterday it will add its PFresh grocery section to 350 more stores next year, on top of the 108 currently carrying the larger food selection. The stores offer about 60 percent of the items for sale in SuperTarget stores that contain full supermarkets.

Capital spending on PFresh, including remodeling other parts of the stores, will be about $1 billion next year out of $2.5 billion in projected capital spending, Target said.

With a smaller store format, Target would be following a strategy being tried by Wal-Mart Stores Inc. and Tesco Plc.

“In general, a lot of retailers are more in test mode than have had a proven format at this point,” said Arnold, the Edward Jones analyst.

To contact the reporter on this story: Lauren Coleman-Lochner in Minneapolis at llochner@bloomberg.net.