by Susan J. Aluise | November 17, 2011 9:10 am
Wal-Mart (NYSE:WMT) versus Target (NYSE:TGT). The match-up between the largest and third-largest U.S. retailers is as interesting a battle these days as the Herald Square brawl between Macy’s (NYSE:M) and Gimbels was back in the mid-20th century. While today’s discount sluggers don’t have the promotional pizzazz of a Miracle on 34th Street, the quarterly performance of both companies offers an inside look at trends facing retail industry and the overall economy. But which one is ahead on points at this stage of their head-to-head bout?
Broadly speaking, both Wal-Mart and Target were better off in the latest third quarter than they were last year. Both companies increased sales and revenue during the period, likely a reflection of shoppers’ grudging optimism about the economy. The 0.5% increase in October retail sales the Commerce Department reported Tuesday bore that out.
So which of these widely held retail stocks offers the best value to investors, Wal-Mart or Target? Here are four areas of comparison:
Wal-Mart’s third-quarter earnings fell by nearly 3% to $3.3 billion (96 cents per share) — down from $3.4 billion (95 cents) in the same quarter last year, missing analysts’ EPS estimates of 98 cents. A nearly 9% increase on the cost of sales drove Wal-Mart’s operating margin down to 5.3% from 5.5% last year.
WMT’s third-quarter net sales rose 8.2% to $109.5 billion. The retailer had $101.2 billion in revenue for the same quarter last year. International sales and Sam’s Club performance helped spur revenue growth. Same-store sales grew by 1.3% in the quarter.
Target’s third-quarter earnings beat the Street on Wednesday, rising 3.7% to $555 million (82 cents per share) compared to the $535 million (74 cents) it reported for the same quarter last year. Analysts’ EPS forecasts averaged 74 cents. TGT expanded its operating margin in the quarter to 6.4% from 6.2% last year. The company’s REDcard rewards and Pharmacy Rewards programs boosted traffic, as did its new “Missoni for Target” clothing and accessories line. TGT’s revenue grew by 5.4% to $16.05 billion despite a hit of nearly 10% on its credit card receivables. Same-store sales increased by 4.3%.
Wal-Mart leads the retail industry by a wide margin, ending 2010 with nearly $308 billion in retail sales. It boasts 9,700 retail locations in the U.S. and 28 other countries.
Target’s nearly $66 billion in 2010 sales place it at No. 3 on the National Retail Federation’s Top 100 List. TGT has 1,767 U.S. stores and plans to open its first outlets in Canada in 2013.
At $56.68 a share, WMT is trading 2% below its 52-week high of $59.40 on Nov. 8. It’s also more than 5% above its 200-day moving average and nearly 2% above its 50-day moving average. With a market cap of more than $195 billion, Wal-Mart has a price-to-earnings to growth (PEG) ratio of 1, suggesting the stock is fairly valued. It has a one-year return of 7.2% and a current dividend yield of 2.5%.
At $52.94, TGT is trading nearly 17% above its 52-week low of $45.28 in August. The stock is more than 5% above its 200-day moving average and nearly 1% above its 50-day moving average. With a market cap of $35.7 billion, the stock has a PEG ratio of 1.1, indicating it might be slightly overvalued. TGT has a one-year return of 1% and has a current dividend yield of 2.5%
Wal-Mart changed its slogan from “Always Low prices” to “Save Money. Live Better,” but its edge remains its low-price appeal. WMT’s aggressive price competition took business from TGT and others during the recession, as pressured consumers sought out the best bargains. But as the economy rebounds, WMT is losing some of that momentum. Still, its layaway program has boosted toy sales this season, particularly at Target’s expense.
Target’s slogan, “Expect More, Pay Less,” tells you what you need to know about its strategy. The approach is similar to off-price retailers like Ross Stores (NASDAQ:ROST) and TJX (NYSE:TJX), which tout designer clothes and accessories at low prices. Target thrived before the recession, luring buyers with cheap and chic items. Same-store sales growth averaged 4.5% between 2003 and 2007, then tanked. If the economy continues to improve, chic may overtake cheap as shoppers’ biggest concern.
Overall winner: Wal-Mart, but it’s a lot closer than you’d think. WMT must find a way to boost margins and better control its high cost of sales. Its strong international strategy will be a big part of that equation. WMT also needs to embrace its new slogan more and differentiate itself on more than price.
TGT is a tough contender. If the economy strengthens, its same-store sales should continue to rise. But if the economy slips into another recession, TGT risks another erosion of sales. It’s hard to craft a sustainable and profitable balance between high quality and low prices, as Gimbels (which boasted the oddly similar slogan “Select, Don’t Settle”) discovered in the mid-1980s. Target needs to stay on message, control costs and affordably cash in on the merchandising strategies that give it an edge.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.
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