Growth5 Blog

Sunday, March 15, 2009

Wal-Mart vs. Target in the Recession

During the current recession as shoppers are looking for "good buys" you would think that a company like Target would be flourishing. Apparently they aren't "discount" enough.

Time compares the two stores in this article.

Some highlights:

1. Wal-Mart has always dwarfed Target's revenue ($406B to $65B) but until recently Target had been growing faster: 4.6% to 2.9% from 2003 to 2007. Over the same period Target's annual profit growth averaged 16% while Wal-Mart was at 10.3%. Since the recession, Target sales have fallen 2.6% while Wal-Mart's have grown 3.3%.

2. Wal-Mart is seen as a store that sells consumables (45% of its shelf space), while Target is seen as an apparel store (only 20% of its shelf space is for consumables). By taking the consumables approach, Wal-Mart has positioned themselves as "selling you what you need to have," vs. Target where things are so bad that even cheap clothes are a luxury now.

Because their prices are so good, Wal-Mart looks at groceries as getting customers in the store for the first time where they will then buy other items. Target sees groceries as an add-on sale.

3. Target is one of the last major retailers to own a part of its credit card portfolio. In tough times, retail card obligations get paid after the mortgage and other credit card debt. Rising defaults and delinquencies have hurt earnings ($135M pre-tax loss on credit in the 4th quarter alone). In May, Target sold 47% of its receivables to JPMorgan Chase for $3.6 billion.

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Might this be a good time to take a look at Wal-Mart stock? In a research note entitled "It's Wal-Mart's Time & Investors' Opportunity," Deutsche Bank analyst Bill Dreher Jr. wrote: "Bottom line, Wal-Mart is executing flawlessly."

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