Walmart (WMT) vs. Target (TGT)

TGT reported after yesterday’s close, WMT after Monday’s. Both retail giants released earnings reports that blew away the consensus, including gigantic increases in online sales (due in large part to their relatively small percentage of the firms’ business). TGT is up by 11% in early trading; WMT fell in a flattish market yesterday. Both stocks have outperformed the S&P 500, although compared (unfairly, maybe) with NASDAQ they’ve been significant year-to-date laggards (the S&P is up by 5.5% ytd as I’m writing this just after 9:30 am; Amazon is up 78%, WMT 12.5%, TGT 16%, NASDAQ 25%).

Yes, TGT’s year-over-year sales gains were more impressive than WMTs. But I don’t think that explains the difference in the market’s reaction to the results. What really caught my eye is that WMT’s sales comparisons began to sag after the government stimulus checks ran out. TGT’s didn’t.

I think this has to do in large part with the differing demographic positioning of the two chains. As I see it, the poorest Americans are served by smaller local firms that are not publicly traded and are therefore below Wall Street’s radar. Of the parts of the economy we as retail stock investors can view, the least affluent tend to be customers of the dollar stores; WMT customers are one rung higher; TGT customers a notch higher than that. All are traditionally below department and specialty retail stores, where the upper half on the income scale has shopped. As the economy ebbs and flows, the customer base for all these retailers shifts down and up as consumers alternately economize and splurge, based on the overall business climate.

My impression has always been that WMT is much more rigidly than TGT following a formula that led to its great success a generation ago. That may not be entirely fair. Certainly, its large size and assorted restrictions on expansion into urban areas are much harder for a giant like WMT to deal with than its rivals. On the other hand, WMT is pretty much 0 for the internet so far, and its forays into foreign markets other than Mexico hasn’t been pretty.

Anyway, whatever the cause, what I get out of the reports is that the pandemic has pushed WMT customers much closer to the edge of the cliff than it has TGT customers. That’s the difference in the stock market’s reaction to the results.

2 responses

  1. Just hoping to clarify three points, if you don’t mind:
    1. What does this mean, with correction of the typo? “On the other hand, WMT is pretty much 0 for the internet so far”
    2. I’m not sure what you mean by this: “the pandemic has pushed WMT customers much closer to the edge of the cliff than it has TGT customers.”
    3. You recommend investing in TGT over WMT?
    Thanks for the clarifications.
    Dave

    • Thanks for your interest.
      With my “0 for” I was trying to say that despite its incredible growth history in the 1980s and 1990s, WMT seems to me to have been relatively slow to embrace the internet as a key factor in its business in the US. I don’t know why. Often when something like this happens with a group of highly skilled people, it’s because the heads of large but mature business lines within a company see any new direction as a threat to their power and influence and they undermine the effort. I have no idea what the cause is here, though. But, to my point, a few months ago WMT shut down online retailer jet.com, which it bought for $3.3 billion in 2016.
      The stock market believes that WMT customers are generally less well off than TGT customers. My conversations with WMT managements over the years, my own observations of many WMT stores and my 25+ years of watching the ebb and flow of revenues convince me that this is true. This is partly WMT’s market strategy, I think, partly the company’s rural roots, partly its lack of a fashion flair, partly its inability to penetrate higher income markets in the Northeast and in California. In the heavily built up northeast, it’s hard to secure locations; in both areas WMT faces strong resistance from local businesses and unions.
      As it turns out, I recently bought a small amount of TGT in an IRA. I’m hoping to buy more on decline. I haven’t owned WMT for a long time. I keep an eye on it nowadays mostly as an indicator of how Americans with somewhat below average incomes are faring.
      My sense is that what I’m writing is the consensus view among professional investors. If WMT were to be getting its act together, that would be a very big positive surprise for the company.
      Dan

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