WMT or TGT? Look to GDP for a Hint

by Alyssa Oursler | March 1, 2013 1:15 pm

Anyone who has shopped at Walmart (NYSE:WMT[1]) or Target (NYSE:TGT[2]) could tell you that — even though the two are often compared as dueling big-box discount retailers — they come with two very different customer experiences … thanks to two very different corporate strategies.

Arkansas-based Walmart, to start, began with a simple concept: Everyday low prices. Even now, if you head to its website, it boasts  “the strongest match policy in the industry.” And last year, WMT had a $2 billion initiative working to further lower prices. Head to a store and you can tell that low prices are the driving force behind the business, as the customer experience is far from pleasant.

Target, on the other hand, is much more focused on customer experience[3]. The store, from the beginning, branded itself with a hip, edgy look and hip designer products. Just glance at the clean-cut graphic design of its website and commercials. But it’s not just about customer experience; it’s having the best of both worlds. The retailer is still a discounter, as it recently added a low-price promise, for example.

Really, the difference can be summed up as a matter of want vs. need. One of Target’s biggest recent moves, for one, was introducing a loyalty card — an incentive for shoppers to buy more.  Walmart doesn’t offer one because it simply doesn’t need a card to lure in consumers; it focuses on consumers who need to shop there.

Such a divergence between the two companies raises a simple question for investors, as well: Which strategy is better … and when? This question is especially relevant in light of yesterday’s GDP revision. The growth rate for Q4 came in at a meager 0.1% — up from an initial reading of a contraction of 0.1%, but far from earth-shattering. While GDP has technically grown for 14 consecutive quarters, growth slowed sharply at the tail end of last year.

An article on the two discount chains[4] recently conjectured that the more affluent shoppers found at Target “spend more freely as the economy begins to show new signs of life, while consumers in the lower-income brackets continue to hold tight to their purse strings.” She also added that “Target’s customers may be a little more resilient than Walmart’s to the economy’s woes,” making Target sound like the better choice after yesterday’s news.

But historically — looking at each company’s stock compared to GDP numbers — such a conjecture is only half-true. In general, the two stocks actually move in lockstep and more or less correlate with GDP — as you can see in the charts to the right from the past decade.

With that in mind, slow GDP growth is naturally worrisome for both companies. But several times over the past decade, Target’s consumers appeared slightly more affected by economic conditions — whether those conditions were good or bad.

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If you take a look at the second half of 2004 and second quarter of 2005 , for example, GDP growth led to TGT outperformance. The same was true in the fall of 2006 and, in 2007, Target’s stock gained steadily toward the middle of the year, even as GDP and Walmart muddled. The third quarter of 2009 and the tail end of 2010 tell similar stories.

This confirms the first half of CBS’s analysis — that affluent Target customers spend more freely when things are good — and jibes with our want vs. need dichotomy.

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But the flip side is also evident throughout.
In 2006, GDP slipped in April and Target felt

the effect much more dramatically than Walmart a month or so later.  The middle of
2008 along with the beginning of 2009 tell a similar story. When GDP slides, Walmart and Target both tend to fall, but Target often falls more.

And sometimes, Walmart actually gains slightly. GDP dipped at the start of 2007’s Q4 and Target slid the rest of the year as a result, while Walmart eked out mild gains, as was true toward the end of 2009.

With that in mind, Walmart’s “need” strategy seems to make it a steadier bet for investors, as its products are essentially consumer staples for its penny-pinching customers. Target, on the other hand, has more upside when things are good … but that also means more downside when things are bad.

If you really think GDP is slowing to a crawl, you may be better of loading up with WMT shares. But remember, slowing GDP slows down Walmart most of the time as well.

And if you think things will be all all right and consumers are feeling fine — despite GDP fears, despite sequestration, despite still-problematic unemployment — Target will offer you far more room to run.

As of this writing, Alyssa Oursler did not own a position in any of the aforementioned securities.

  1. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  2. TGT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TGT
  3. much more focused on customer experience: https://investorplace.com/2013/03/ride-target-to-canadian-riches/
  4. article on the two discount chains: http://www.cbsnews.com/8301-505145_162-57551520/walmart-and-target-a-tale-of-two-discount-chains/

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