Target Gains on Wal-Mart

Bolstering Mandel's case, the company said Monday after the bell that same-store sales in July are tracking above its guidance for a 1% to 2% increase in its Target stores division.

Target's more fashion-forward denim offering, at a higher price point than last year, is helping move inventory, according to another analyst. "This trend-right assortment, relative to last year's focus on athletic bottoms, cargos, and military-inspired styles, should provide a leg up on comps for the next several weeks," said Piper Jaffray's Jeffrey Klinefelter.

In June, along with the most of the retail sector, Target reported softer same-store sales, up 2.3% vs. May's 4.6% gain and April's 4.9% increase. The company had a 2.4% increase in June 2003 same-store sales.

Mandel thinks the most-recent June results say less about Target's customers budgeting their money and more about the company's strong seasonal sell-throughs earlier in the period.

Mandel concedes that more price competition from Wal-Mart could pressure Target's future gross margins. For now, though, Target is holding its own on margins, Klinefelter said, because of lower markdowns and inventory control.

Wal-Mart also reaffirmed Monday that it expects same-store sales in July to be up 2% to 4%, saying back-to-school shopping and warm weather helped boost sales.

But the world's largest retailer could be getting too big for its own good, Mandel said. "As Wal-Mart increasingly becomes an omnipresent retailer, its fortunes will likely be tied to shifts in economic growth," said the analyst, who also has a buy rating on its shares. In addition, he noted that the company's ongoing expansion plans will eventually peter out, a development that would cause a deceleration in profit growth.

The Bentonville, Ark.-based giant has also received some unpleasant press in its quest to fulfill its expansion plans. The company has had to fight with city governments to get approval to build its humongous stores. Most recently in Chicago, city council officials launched a campaign to put into law a requirement that big-box retailers pay workers around $10 an hour, provide benefits and adhere to other community standards, according to the Association of Community Organizations for Reform Now. Wal-Mart has been under nearly constant pressure to pay its workers more.

Wal-Mart is also being sued by 1.6 million former and current female employees who say the company systematically denied them equal pay and promotions.

Wal-Mart and Target face macro pressures going forward. Standard & Poor's said in a research report released Tuesday that is concerned about rising raw material and energy costs on the consumer products sector.

Additionally, the food and non-durable sectors face uncertainty over the ability to raise prices to maintain margins, S&P said. This is especially true for Wal-Mart, whose grocery business is thriving. The agency noted, however, that large retailers have more leverage to limit price increases. And cost-cutting measures incorporated in the last few years could help companies continue to perform well, it said.

One hanging thread on Target's future is its remaining 248 Mervyn's stores. That announcement could come soon, Mandel predicted. He expects that the company could receive around $2 billion for the chain if it's sold to a real estate or private investment firm.