I wrote about Target (TGT) last May. (See also: "Why Are Target Shares Off Target?") At that time, the giant sundry item retailer with chic style was trading in the mid $50s. Having suffered for the first half of the year, as consumers spent less and moved business to Wal-Mart (WMT), TGT was being sold by investors.
I thought that selling was a bit overdone. TGT is a proven winner, and with an economy that was on its way to recovery, I thought owning shares at the lower prices made rational sense.
That was then, this is now. And now is not pretty. We are in the midst of a credit crisis that nearly collapsed the entire world financial system. As we struggle to find a solution to the mess, investors need to ponder the impact on the economy and companies like TGT.
I’m not optimistic. You do not stare at the grim reaper without it having some consequences. For the economy, those consequences mean contraction as opposed to expansion.
That means more trouble for the consumer and those that sell to the consumer. It is a tough market out there, and only the strong will survive. TGT is strong enough to survive, but not before there is more damage. (See also: "Buy Stocks That Are Right on Target.")
TGT’s model of selling at slightly higher prices was the winning formula during a period of impressive growth. That model works well when the consumer is strong and has discretionary income to pay a bit more for the goods that TGT sells.
That is not the case today. Consumers are spending less, and that trend is likely to become stronger as we emerge from this credit crisis. There is no quick solution to this problem.
On the flip side, there’s Wal-Mart. Wal-Mart has been taking full advantage of its pricing power, and its strategy of offering low prices has paid big dividends. While other retailers were losing customers, WMT was working hard to keep its business on track.
Investors in WMT have been duly rewarded. Shares have been big winners over the last year and have held up well during this recent crisis in the financial markets. Looking at a chart of both WMT and TGT during the last twelve months would reveal two companies headed in opposite direction.
TGT has moved down from the $60 range to the high $40s over the last year. WMT has gone the other direction moving into the $60s from the mid $40s. In percentage terms, WMT is up nearly 40% versus TGT being down 20%.
Now, value investors are absolutely in love with TGT at these prices. As a value investor myself I can appreciate that sentiment, but they are too early in the call and not fully appreciating the length of the current malaise.
The problem is we are only now just entering the storm with respect to how the credit crisis impacts the economy. As they have been saying while Congress negotiates the bailout that is no longer a bailout, Main Street has yet to see how the crunch will feel. When they do feel it, watch out.
WMT announced Wedensday that they are discounting prices on ten top toys for the holiday season. Specifically, they are dropping the price by $10 on things like Hot Wheels and Barbie. That move, though seemingly minimal, cannot be good for TGT.
There is more damage to come that is almost certain. Target is not well positioned for a protracted downturn. Look for more devaluation in the stock as a result.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com and check out:
