While Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT) are considered the “Coke and Pepsi” of modern discount retail, they’re not nearly as similar as most people think.
For one thing, WMT generates much more volume per quarter, about $120 billion, than TGT generates in a year, about $70 billion.
Target’s results are also choppier. It had a great Christmas last year, but a massive theft of customer data by hackers in 2013 hampered results for years and resulted in a turnover of the executive suite.
The history is also different. Walmart started as a discount chain, while TGT is descended from the old Dayton’s department stores, which were eventually merged with Marshall Field’s and spun out in 2004. Target is generally more corporate than WMT, which is still run in the image of entrepreneurial founder Sam Walton.
Target stock is riskier, but its smaller size means it can change strategies quickly. The company has changed its strategy lately, under new CEO Brian Cornell, and investors need to understand the changes before buying Target stock.
TGT Is Becoming a City Mouse
Early in 2016, the big story at TGT was that it was beating WMT in e-commerce. It integrated its online store with in-store pick-ups last Christmas, growing online sales by 30%, and was planning $2.5 billion of investments in technology by 2017.
Analysts were initially skeptical of it’s move, and early results were poor, but last Christmas made analysts believers of Target stock and the company is now considered an e-commerce leader.
Cornell’s latest move is even bigger. He’s going to make TGT the City Mouse to Walmart’s Country Mouse.
Target plans to open hundreds of small-format stores, mostly in large cities, reshaping the company’s image and real estate footprint in the process.
WMT CEO Doug McMillon had tried something similar starting in 2014, opening Neighborhood Markets and planning Walmart Express stores built around gas stations, but Walmart abandoned the plan this year, closing 269 outlets.
The difference between the two plans lies in where the small stores are, and who they are aiming at.
While the Walmart Neighborhood Markets were in suburbs, and represented in-fill between larger Walmart SuperCenters, the new TGT stores are in the center of cities, and in college towns, highlighted by a 45,000 square-foot unit in Tribeca, in lower Manhattan.
While the Neighborhood Markets were also smaller, cookie-cutter versions of WMT’s larger outlets, heavy on the groceries and mostly self-service, the new Target stores are customized to their neighborhoods and the company is investing heavily in its supply chain to get the specific goods each location needs.
Bottom Line on Target Stock
It’s the planned adaptation to local tastes — and the back-end supply chain needed to fulfill those needs — that is going to determine whether this plan succeeds.
In setting his sights on urban life, Cornell is going after a growth market and taking advantage of TGT’s smaller size, relative to Walmart. The question is whether the chain’s discount image can handle the shift, and whether it can deliver prices that are below those of other retailers in urban cores.
If Cornell can make this work then Target stock becomes a real threat to stores like Whole Foods Market, Inc. (NASDAQ:WFM) on the grocery side and Macy’s Inc (NYSE:M) on the retail end. These high-end merchants have focused on urban markets to maintain margins, and TGT is threatening to cut them.
Another question is whether urban consumers will flock to a store called Target. Cornell thinks they will, because many urban newcomers are families with small children, not the singles and young marrieds who moved intown in previous decades.
Such consumers may be looking for bargains. If they are, and if Target can integrate its e-commerce efforts neatly into such stores, the company’s stock could be in for big gains.
If you’re willing to take a bigger risk for a possibly great reward, look to Target. If you’re mainly looking for yield and relative safety, you’re a WMT shopper.
Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
