Its happy holiday performance has investors focusing even more sharply on
grabbed the headlines with much-better-than-expected sales gains, which the company said will lead to an in-line fourth-quarter earnings performance. But rival Target, which has gained a reputation for making discount shopping cool, did Sam Walton's crew one better, posting strong sales and boosting fourth-quarter earnings guidance.
The results point up a key difference between Wal-Mart and its upstart rival. The key to Target's appeal is its
ability to entice shoppers without competing primarily on price, a strategy that produces stronger earnings growth. Wal-Mart, meanwhile, continues to gain market share by cutting prices. That boosts sales -- but at the expense of margins. Yet its shares trade at a premium to Target's.
Now, some investors are saying that the results of this holiday season, which was highly promotional for most retailers, only confirm that Target is a far more attractive stock at these levels.
"I think if you look at Wal-Mart right now, they are going after an aggressive market share grab, and they are doing it with price," says Jeff Stinson, an analyst at Midwest Research. "In the long term, retaining those customers is going to be somewhat of a challenge." (Stinson rates Target buy and doesn't officially cover Wal-Mart. His firm doesn't do investment banking.)
Target vs. Wal-Mart
Same-store sales estimate according to Thomson Financial.
David Brady, a former retail analyst who now manages about $1 billion of assets in the Stein Roe Young Investor Fund, says, "I'm not surprised Wal-Mart didn't take up numbers. Through their comments it would appear they were very competitive on price, and we would not be surprised if margins come in less than expectations." Brady owns Wal-Mart shares but not Target, and is confident Wal-Mart can manage costs to meet earnings estimates despite lower margins.
The risk in Wal-Mart's strategy is that the customers it gains now, in a recession, will bolt for slightly more upscale chains like Target once the economy improves, Stinson says. This is one reason that investors such as Robert Shoss, who manages AIM Management's large-cap growth fund, own shares in Target but not in Wal-Mart.
"With Wal-Mart you are getting a more stable and reliable company and therefore less risk, but we feel better about the upside potential for Target," Shoss says.
It is a bet that has paid off in recent months. Since late September, when the market bottomed in the wake of Sept. 11, Target shares have risen 55%, and lately traded at $40.30. Wal-Mart was lately trading at $55.80.
Wal-Mart's focus on slashing prices to gain market share has clearly grabbed customers from
, which reported a
dismal holiday season Thursday and lowered its earnings guidance. But it has hardly tarnished the luster of Target.
Emme Kozloff, of Sanford Bernstein, continues to rate Target stock higher than Wal-Mart, partly due to Target's impressive margin advantage. According to her estimates, Target's gross margins are expected to come in at 30% for the full fiscal year that ends in January, compared with 21% for Wal-Mart. (She rates Target market outperform and has a market perform rating on Wal-Mart. Her firm doesn't do investment banking.)
The companies have similar projected annual growth rates: 15% for Target and 14% for Wal-Mart. But based on next year's estimated earnings, Target trades at a price-to-earnings ratio of 24, while Wal-Mart trades at a P/E of 33.
One more reason to hit the bull's-eye.