Target's new strategy: Small, cheap and risky

With its shares at a 52-week high, is now the time to shift gears?

By Jamie Dlugosch Jan 27, 2010 10:11AM

The National Retail Federation released its 2010 economic forecast yesterday, predicting that retail sales will increase by 2.5% for the year.


Retail stocks zoomed higher, and Target (TGT) traded at a new 52-week high.


That rosy prediction is all well and good, but solid growth in 2010 will not change consumer behavior. Belts are tight and will remain so for a while.


That makes it a huge risk for any retailer that's weathering the recession well to change its game. Yet that's exactly what Target seems ready to do.


Last Thursday, Target announced a tactical change that will reduce domestic expansion while focusing on remodeling outlets in order to further emphasize grocery and bulk items. It sounds to me like a change from trendy and inexpensive to flat-out cheap.


I suspected this was coming and wrote about it in a recent Top Stocks blog entry. Many of you thought I was overreacting to what could simply be a temporary move or a test by the company.


No overreaction whatsoever. It's a strategy.


Interestingly, in the release the company stated that it would meet or beat analyst estimates of $1.11 per share earnings for the fourth quarter. In my blog, I suggested that the change in strategy may be related to weakness in fourth quarter performance.


That not being the case, I find it hard to understand exactly why Target is moving in a different direction.


Understandably, a permanent change in consumer behavior requires a response. But we don't know yet whether consumers have really changed their habits for good. And with Target having worked so hard to dominate a specific niche, it would seem silly for it to change course.


Yet, that is what appears to be transpiring.


As CNBC reported in this story, it's far from certain that Target can compete with discount/warehouse kings Wal-Mart (WMT) and Costco (COST).


And there's a real risk the thrifty but upscale shopper will leave Target altogether in favor of another retailer that has not abandoned the chic cheap approach.


Target did note that its international efforts would include Canada, Mexico and Latin America. One of my Top 10 Stocks for 2010 is PriceSmart, Inc. (PSMT), a discount retailer already with a toehold on Mexico and Latin America.


As for Target, I would be quite reluctant to own shares during this change of course.


(The stock I would buy is PriceSmart (PSMT) for these five reasons.)


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