Wal-Mart, Target Offer Deals: Industry Insight

"Industry Insight" is a weekly series that examines sectors through what's known as the five forces of competition, which can help separate the winners from the losers. Come back every Monday to see which industries and companies will be put under review.

BENTONVILLE, Ark. (TheStreet) -- They may be ugly but big box-stores like Wal-Mart Stores(WMT Quote), Target(TGT Quote), Costco Wholesale(COST Quote) and BJ's Wholesale Club(BJ Quote) aren't going anywhere.

While many expect Web commerce to render brick-and-mortar retailers obsolete, these chains have been hedging their bets and expanding their presence online. If you size them up based on the five forces of competition concept developed by Michael Porter of Harvard Business School 30 years ago, you'll find a strong investment case.

Performance in this sector has been weak with only Target beating the broader market this year. However, these companies' stocks are cheap, with price-to-earnings ratios that are less than the industry average.

Degree of rivalry: Price cuts and convenient locations are the most potent weapons for competitors in this space. While prices wars can reduce margins, much of the pain is spread to suppliers that can't afford to not do business with stores like Wal-Mart and Target.

It's not uncommon to Wal-Mart and Target stores separated by only a few hundred yards on a commercial road. The ability for these stores to survive even with tight grouping is proof that massive discounts are less important than overall sales volume.

Last year, Wal-Mart had more than $405 billion in sales, an operating margin of 5.6% and a profit margin of 3.3%, versus an average operating margin of 6.1% for all retailers and a profit margin of 1%. The company's size allows it to spread costs more efficiently, allowing it to make money despite the thin profits it reaps on individual items. This makes it more difficult for smaller operations to compete.