As consumers scale back on spending in the face of a softening U.S. economy, at least one analyst suspects that more shoppers are choosing Wal-Mart Stores Inc. over rival Target Corp.
Sagging home prices, higher gas prices and job cuts have Americans paying close attention to how they spend their money. Investors are taking note — since late November, shares of Wal-Mart have soared, outperforming Target by double digits. Target shares are testing year-plus lows, while Wal-Mart touched a nearly three-year high earlier this month.
Despite weak consumer spending, Bentonville, Ark.-based Wal-Mart last week posted a 4 percent higher fourth-quarter profit, helped by a renewed focus on low prices and big holiday discounts.
Wal-Mart, the world's largest retailer, has benefited from its grocery business and home electronics offerings, which include flat-screen televisions and computers.
On the other hand, Target has posted weak same-store sales and experienced weakness in women's retail, where it typically records higher margins. Earlier this month, Target said same-store sales slipped 1.1 percent in January, partly because of lower traffic.
Citi Investment Research analyst Deborah L. Weinswig said Wal-Mart's "low-price message" resonates better with consumers, who are trying to scale back on spending and get the most for their dollar. "Based on our proprietary survey findings, an overwhelming 87 percent of customers surveyed said that Wal-Mart had the lowest prices," Weinswig wrote in a note to investors Thursday.
Weinswig also said Wal-Mart provides a "one-stop shopping experience" for consumers, allowing them to purchase food, consumables, groceries, and discretionary items in one visit. This is important because consumers have been consolidating trips to cut down on gas use.
"Target is not perceived as a destination for basic needs, which we believe is why the retailer's traffic trends are weaker than those of Wal-Mart," Weinswig wrote.
UBS analyst Neil Currie said Wal-Mart's apparel and home merchandise offer further prospects for boosting profit margins, especially now with a "return to basics."
"It's now a matter of Wal-Mart further fine-tuning store execution in its U.S. operations, which, along with successful merchandise categories ... offer prospects for ongoing sequential sales improvement," Currie wrote in a client note.
With Target set to report fourth-quarter results Tuesday, Weinswig cut her rating on the Minneapolis-based chain to "Sell" from "Hold," maintaining that it has lost its focus in women's apparel, one of its higher-margin businesses. Weinswig said Target lifted prices too high, which consumers are resisting amid economic weakness.
Meanwhile, Target hasn't yet decided the fate of its credit-card operations. The company has been mulling whether to sell its credit card receivables since September.
Weinswig forecast weakness in Target's credit card profits this year because of further economic deterioration, with delinquencies rising as well.