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How Target Rebounded From Holiday Disappointment

Tuesday, 12 Feb 2013 | 2:21 PM ET
Source: target.com

Target's hit its stride again with its Prabal Gurung collaboration.

In the company's first collection after its Neiman Marcus collaboration disappointed analysts, Target has already sold out of several items online, while also avoiding the website crashes that have plagued its past successful launches.

"We are pleased with the stability of the online site during this high-traffic event as Target continues to work on its ecommerce platform," Citi analysts said in a recent research report. "We also view the collection as a return to style leadership at an attractive value following what we found to be the disappointing Target Neiman Marcus Holiday Collection."

Following the launch, Citigroup reiterated its "buy" rating on the company's shares. It has a $72 price target on Target stock, which is 15 percent higher than the price of shares midday on Tuesday.

In another mark of the Prabal line's success, more than 2,500 of the limited edition's pieces have now ended up on eBay at marked-up prices as consumers jockey for some of the more popular floral items.

While the holiday collection featured a large number of pieces from popular designers at fraction of their usual prices, the sticker shock was still too much for customers. (Read More: Neiman Launch Is No Missoni Collaboration)

"After the Neiman Marcus partnership was widely regarded as too pricey for most Target shoppers with a range of $7.99 for wrapping paper to $499.99 for a bicycle, the Prabal Gurung price point was well-received, in our view," said JPMorgan analysts in a recently released note. JPMorgan has an "overweight"rating and a $74 price target on Target stock — an 18-percent increase from the share price on Tuesday.

For the Prabal collection, which launched during Mercedes-Benz Fashion Week in New York, Target lowered the price points for several comparable items. For example, a Lela Rose dress from the Neiman collection was $99.99 while a Prabal dress went for $49.99. Meanwhile, a Thom Browne blazer fetched $129.99 in December, while Target priced a floral blazer from Prabal at $49.99. (Read More: Highlights From New York Fashion Week)

JPMorgan analysts also observed better store placement for some of the items and indications of limited merchandise for the collection.

"It was probably the wrong time of year," said Jeff Jones, Target's chief marketing officer, about the Neiman collection. "When we really think about the holiday season, we think about the value that guests are looking for then and so some things like that we learned that made it just not as successful that we would like it to be."

To avert the supply shortage that occurred during Target's widely successful collaboration with Missoni, Target also upped its inventory for the Neiman launch.

"We bought about 2.5-times the normal inventory and in hindsight, we think that was too much," Jones added.

Despite describing the Prabal line as a "nice recovery after a disappointing showing," JPMorgan doubts the line will boost the company's same-store sales growth this month. Last month, Target same-store sales rose 3.1 percent, beating Wall Street's estimate of 1.7 percent, according to Thomson Reuters. (Read more: Retail Sales Beat Forecast Despite Payroll Tax Bite)

"While we don't expect the collection to provide a significant lift to comps (particularly given the Jason Wu for Target collection in February 2012), we believe it demonstrates Target's effort to produce exclusive, compelling merchandise in order to maintain share as online competitors encroach on traditionally brick-and-mortar territory with low prices and increasingly faster shipping speeds," research analysts said.

-By CNBC's Katie Little; Follow her @katie_little_

Questions? Comments? Email us at consumernation@cnbc.com.

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