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Target vs. Wal-Mart: The Next Phase

Target vs. Wal-Mart: The Next Phase

Ben Steverman

In the downturn, Wal-Mart’s low prices have trumped Target’s cheap chic. With a recovery on the way, the discount giants are readying for the next chapter in their rivalry.

The economic downturn has made an already competitive retail landscape especially brutal and unforgiving. Exhibit A is the rivalry between discount retailers Wal-Mart (WMT) and Target (TGT).

The clear winner in the current downturn was Wal-Mart. Amid millions of job losses and plunging stock and housing markets, new customers flocked to Wal-Mart, at the expense of almost every other U.S. retailer except ultralow-price dollar stores.

It appears that “cheap chic”—Target’s famous selling point—is not the primary concern of recession-battered consumers. Last quarter, the average U.S. Wal-Mart store actually saw traffic increase 1.3% from the year before. By contrast, last quarter Target’s traffic was down 2.6% from a year ago. “Even with lower sales than we’d expected,” Wal-Mart Chief Executive Officer Mike Duke told analysts Aug. 13, “we believe that our comparable store sales outperformed the retail sector almost every place where we do business.”

Wal-Mart’s advantage during a recession is its low prices. “Everybody is becoming more price-conscious rather than fashion-conscious,” says Thomas Nyheim, a portfolio manager at Christiana Bank & Trust Co., which owns Wal-Mart shares. “Nobody can match Wal-Mart on pricing.”

One of Target’s problems is its reliance on discretionary purchases, which make up about three-fifths of sales. Target customers"now focus their shopping more on need than entertainment," Target Merchandising Executive Vice-President Kathy Tesija told analysts Aug. 18. That skews purchases toward food and other necessities, and away from clothing and items for the home.

Wal-Mart did feel the impact from slower consumer spending. U.S. same-store sales dropped 1.2% last quarter, according to results released Aug. 13.

And, Target, like Wal-Mart, benefits from consumers trading down from the pricey to the less expensive. “We continue to gain affluent guests from department stores,” Tesija said.

However, Target—despite its status as a discounter—did far worse than Wal-Mart in its sales. It saw same-store sales tumble 6.2% in a year.

Both firms win kudos from analysts and investors for managing inventories and costs at a tough time. Earnings figures for both beat Wall Street expectations.

But if the main fight between Wal-Mart and Target is over customers and sales figures, Wal-Mart clearly won out in the past year.

In all, total sales at Wal-Mart rose 2.7% last quarter from a year ago, to $104.3 billion, when one ignores the impact of currency fluctuations, which hurt Wal-Mart’s large overseas operations. At Target, sales fell 2.7%, to $14.6 billion in the second quarter.

TARGET WILL LEAD IN A RECOVERY

Those numbers, however, reflect the trends of the past year, a particularly tough time. For investors and even executives, the crucial question is what happens next. Those who are expecting an improvement in the economy and a recovery in consumer spending tend to favor Target.

“People were shopping at Wal-Mart because it was the cheap place to shop,” says Bernie McGinn, chief investment officer at McGinn, McKean & O’Neill. An owner of Target shares, he believes consumers will gradually return to “a sense of normalcy.”

“If you’re feeling less pinched, you go out to Target,” McGinn says. “You know you’re going to get a good value, and you’re going to walk out with something a little classier than [at] Wal-Mart.”