Target (NYSE: TGT) has concluded that being flexible about the size of its stores opens up new markets for the company.
The company has a portfolio of 30 stores that are well smaller than its normal locations. By operating stores that are under 50,000 square feet, with a selection of merchandise more tightly tailored to their local markets, Target can go after consumers it otherwise would not be able to reach.
That’s an approach that rival Wal-Mart tried and ultimately abandoned, but Target has been encouraged by its early results. CEO Brian Cornell spoke about the smaller stores during the company’s recent earnings call which was transcribed by Seeking Alpha (registration required).
“We are really excited about the continued and strong performance of our new flexible format stores,” he said. “These new locations allows to reach new neighborhoods in dense urban and suburban markets. We opened another five of these stores across the country in the third quarter, including our fantastic new store in the Tribeca neighborhood of New York City.”
What happens next?
Cornell believes the lessons learned from the 30 existing small stores should help the company as it adds new ones. He also noted that these locations required a level of flexibility and a willingness to do things differently than at the chain’s traditional locations.
“Based on their performance, we are increasingly confident and the opportunity for Target to profitably operate hundreds of urban and flex format stores over time, reaching new neighborhoods where consumers have a strong affinity for our brand,” he said.
The CEO did not offer a timeline for this to happen, but the chain has been steadily rolling out new stores — both large and small. These smaller locations are still a bit of an experiment for Target, but the rate of deployment could be ramped up now that Cornell believes they are working for the company.
Is this a good idea?
It’s hard to build a full-size Target in a city. Opening smaller stores lets the company go places it otherwise might not have been able to without disrupting the communities it intends to serve.
This is a still an unproven strategy, but Target has slowly been building its case. The company should continue to operate deliberately, carefully considering every store location and what it sells there, but this should be an opportunity for growth.
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Daniel Kline has no position in any stocks mentioned.
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