Retailing is a tough business. Industry CEOs grapple with changing consumer priorities and tastes, evolving technologies for shopping, purchase and pickup, and supply chains vulnerable to changing political winds and other forces.
Some CEOs turn these challenges into opportunities better better than others do. For example, Walmart stock keeps setting new records — rising 10% since a strong November 19 third-quarter earnings report; while Target’s has lost 15% since its disappointing November 20 Q3 report.
Walmart stock could keep rewarding investors while Target’s could disappoint them for the following reasons:
- Walmart’s revenues are growing while Target’s decline.
- Value-sensitive and upscale shoppers prefer Walmart’s merchandise, pricing, and delivery speed to Target’s.
- Target suffered from supply chain problems during a dockworker’s strike which barely scathed Walmart.
Target’s good news is the November 29 launch of Taylor Swift’s The Eras Tour Book at nearly 2,000 stores — prompting shoppers outside a Chicago store to line up at 5 AM to buy her $39.99 tome, according to Reuters.
While Walmart’s share price keeps rising steeply, Target’s has slumped nearly 50% since peaking in October 2021. Swift’s book is unlikely to halt that divergence.
Third-Quarter Performance And Prospects: Advantage Walmart
While Walmart beat analysts’ sales estimates and its full year forecast; Target — which sells apparel and other discretionary categories — “badly missed sales expectations, cut its forecast and saw the steepest drop in its stock for years,” according to the New York Times.
The numbers bear out this tale of two retailers. Walmart comparable sales increased 5.4% in the October 2024 ending quarter — 1.5 percentage points more than forecast while raising its fiscal year guidance for the third time in 2024 to a range — the midpoint of which is 5%, according to the Wall Street Journal.
Meanwhile, Target missed its financial targets. The retailer’s comparable sales grew 0.3% — 1.1 percentage points more slowly than Wall Street expected. Target also lowered its earnings per share guidance for the current quarter to a range — the midpoint of which is $2.15 — 50 cents below the level of analysts polled by FactSet.
Target expressed optimism. “There’s some macro short-term headwinds that we’ve got to embrace and understand,” Target CEO Brian Cornell told investors on November 20. The company’s mix of categories and distinctive private brands is a long-term strength, Cornell added.
Merchandise Selection And Pricing: Advantage Walmart
While Target’s merchandise selection and pricing have fallen short of consumers’ more conservative spending patterns, Walmart’s merchandise and pricing are winning over some Target’s customers while appealing to the retailer’s more value-sensitive consumers.
Target’s Merchandising And Pricing Could Be Better
One analyst argued Target’s selection and pricing are better suited to more optimistic consumers. Target’s weak financial results are “a function of a product positioning that is better suited to a more bullish spending environment,” wrote Michael Baker, managing director at D.A. Davidson, in a client note featured by the Times.
Target is aware of consumer’s price-sensitivity. Customers are “being very patient, shopping for promos, looking for great value on those essential items that they need for their pantry,” Cornell told reporters November 19. “And they’re shopping very conservatively and have been in discretionary categories throughout the year.”
Target had lowered prices to reflect consumers’ shopping preferences. The retailer reduced “prices on more than 2,000 products for the holidays and rolled out a Thanksgiving dinner deal that put the cost of the holiday meal below last year’s total,” reported the Associated Press.
Target’s lowered expectations for the current quarter suggest its price cuts did not bring in enough additional revenue.
Instead, less effective merchandising may be a cause of the retailer’s weaker outlook. How so? Customers complained Target’s merchandise lacked excitement and too many items were “locked up behind glass cases,” noted the Journal. Target customer also griped about items missing from shelves, long checkout lines, a lack of exciting products, and high-priced groceries, according to the Journal.
Walmart’s Merchandising, Pricing, And Delivery Win Over Target Customers
By contrast, Walmart’s strategy is firing on many cylinders. Indeed, a Target customer switched to Walmart — seeing superior prices, selection, and delivery speed, noted the Journal.
Rather than depending on discretionary items such as clothing and accessories, about 60% of Walmart’s U.S. business comes from groceries — which people buy every week, AP noted.
Walmart’s capabilities — including its greater scale, ability to negotiate volume discounts, skill at marketing discretionary items, its Bettergoods private label grocery line, and online shopping services that include curbside pickups — have enabled the Arkansas-based retailer to win over Target households with incomes above $100,000, reported AP.
Target said internal surveys indicate shopper-experience scores have increased in the last year and customers are feeling better about “customer service, checkout wait times, product availability and store cleanliness,” the Journal wrote.
Supply Chain Problems: Disadvantage Target
An October 2024 strike by 45,000 dockworkers hit Target harder than Walmart. While the strike caused a hiccup for Walmart, Target’s struggle with inventory buildup in its warehouses cut the retailer’s profits, AP reported.
Strike talk masked Target’s real problem — an overly optimistic forecast of how many items its customers would purchase and how high a price they would pay. Trade data show Target imported $1.2 billion more goods than Walmart did — meaning Target “missed on its forecast for consumer demand and price-point sensitivity,” according to CNBC.
Target will need to keep discounting “to end the year in a clean position,” Joe Feldman, Telsey Advisory Group senior managing director, told CNBC. That buildup was due to Target’s decision to accelerate and reroute shipments to the West coast to avoid the strike and the retailer’s overly optimistic forecast, CNBC reported.
Target shares trade 38% below the average 12 month price of $182.52; whereas Walmart stock’s upside is a mere 5.2% assuming the Wall Street average price target of $96.65 is accurate, TipRanks wrote.
Walmart’s stock could have much more upside if it keeps winning customers from Target.