Wal-Mart Stores, Inc. (NYSE:WMT) on Wednesday announced plans to push into Canada, less than a month after rival retailer Target Corporation (NYSE:TGT) decided to shutter all 133 of its stores in our neighbor to the north.
Wal-Mart’s increased efforts in Canada come in a period where WMT is hitting its stride. Over the last 52 weeks, WMT stock outperformed the S&P 500 by 3 percentage points, boasting 18% returns for its shareholders.
The question is, why is WMT investing where TGT failed? Does Wal-Mart know something Target doesn’t?
Wal-Mart Canada Has a Lengthy Track Record
While the comparison is tempting, TGT and WMT have very different histories in Canada. Target, for instance, just entered the Canadian market two years ago. Wal-Mart Canada, on the other hand, has had a presence in the country since 1994.
And while TGT did the logical thing and pulled out of a region where it couldn’t foresee profits until 2021, WMT has been expanding in Canada for years — between 2010 and today WMT has opened 74 new stores, bringing its total to 391 locations.
I think this is a great move by WMT, swooping in just as TGT shuffles away with its tail between its legs. The decreased competition spurred the Arkansas-based retailer to commit $270 million to 29 Supercenters and an expanded distribution center.
The learning curve was simply too steep for Target, which chose store locations poorly and couldn’t figure out any lucrative price points that made sense for the Canadian consumer.
Take Pride, Investors: WMT Is a Ruthless Competitor
As former Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL) CEO Eric Schmidt once said to Sheryl Sandberg, the current COO of Facebook Inc (NASDAQ:FB), “If you’re offered a seat on a rocket ship, don’t ask what seat. Just get on.” While Wal-Mart’s opportunistic Canada play isn’t exactly a rocket ship, it’s a savvy offensive move that should be accretive for WMT stock.
In recent years, Wal-Mart has been similarly aggressive against competitors other than TGT, although the aggression was primarily defensive. As cash-strapped Americans in a poor job market began frequenting discount neighborhood retailers such as Family Dollar Stores, Inc. (NYSE:FDO), Dollar General Corp. (NYSE:DG) and Dollar Tree, Inc. (NASDAQ:DLTR), WMT moved quickly to defend its market share.
While Wal-Mart Supercenters average 179,000 square feet, its “neighborhood markets,” on average, are less than a quarter of that area at 40,000 square feet. In 2011, WMT decreased its neighborhood market store count by one. In 2012, as the consumer’s attraction to smaller neighborhood stores became obvious, Wal-Mart added, on net, 21 new small-format stores; in 2013, 76; and in fiscal 2014 it added a total of 121.
Just as TGT stock benefited from Target’s decision to fold its operations up north, the expansion of Wal-Mart Canada should be cheered by WMT stock investors.
After all, Wal-Mart didn’t become the ninth-largest company in the world by passing up seats on rocket ships.
As of this writing John Divine owns shares of GOOG stock and GOOGL stock. You can follow him on Twitter at @divinebizkid.
