Wal-Mart, Target Paint Conflicting Pictures

Wal-Mart and Target paint differing pictures of the state of the U.S. consumer; which one is right?
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NEW YORK (

TheStreet

) -- Discount giants

Wal-Mart

(WMT) - Get Report

and

Target

(TGT) - Get Report

offered two very different pictures of the state of the U.S. consumer when they reported quarterly results this week.

The evidence suggest that Wal-Mart shoppers are still worried about high unemployment and rising prices at the pump. As a result, they're consolidating the number of shopping trips they make and shunning discretionary items like apparel.

"The areas with highest rate of unemployment also posted the lowest comps," Chief Financial Officer Thomas Schoewe said when Wal-Mart reported its quarterly numbers Tuesday. "The number of trips a customer is able to make to the store decreases as gas prices go up over 40%, which has been a major drag on traffic."

Wal-Mart saw yet another decline in traffic

in its first quarteR, as same-store sales slipped 1.1%. That marked the company's fourth straight quarterly drop in comparable sales.

And judging by the company's rather muted guidance for the current period, it isn't expecting consumers to gain much more confidence in the near term. Wal-Mart forecast second-quarter earnings in the range of 93 cents to 98 cents a share. "Our guidance is based on our view of the global business. This includes the continuing challenging sales environment in the United States," Schoewe said in his statement.

Target shoppers, on the other hand, appear ready to spend, opening their wallets to non-essentials like apparel and home goods. Target's CEO, Gregg Steinhafel, even noted a "stronger-than-expected economic environment." As a result, the company reported a 2.8% uptick in same-store sales in its first quarter.

So which retailer's view of the world tells the real story? There's no doubt that consumers, at least in some form, are returning to stores. Retail sales as measured by the Commerce Department have increased for seven consecutive months.

But it's the mid-to-higher income consumer that's driving these purchases. Those shoppers who traded down to Wal-Mart during the depths of the economic recession are now returning to Target and other retailers that they perceive to be of higher quality.

Wal-Mart, meanwhile, has been aggressively promoting price roll backs, announcing on Tuesday that it's further cutting prices on grocery items.

But Target apparently hasn't needed to make such deep discounts. In fact, it indicated that shoppers actually purchased higher-margin merchandise during the just-ended quarter. The company's gross margins improved 50 basis points to 31.3%, Target said. Wal-Mart, by contrast, saw an 8-basis point decline in its gross margins to 24.6%.

Still, even as its comparable sales have trailed rivals, Wal-Mart has demonstrated significant earnings power, with profit surging 10% to $3.32 billion, or 88 cents a share, in the first quarter. That shouldn't be ignored by investors.

Wal-Mart's stock price has nonetheless lagged the broader rebound in retail, with its shares declining slightly since the beginning of the year. By comparison, Target's stock has gained 11% over the same period.

"As such, we believe that Wal-Mart shares, in being underappreciated by the market, represent a solid long-term investment at present levels of valuation," Wall Street Strategies analyst Brian Sozzi wrote in a note.

But if it's growth investors seek, Wal-Mart, due to its sheer size and (at least for the moment) dwindling customer base, won't be able to increase earnings in line with or above that of Target, Sozzi said.

Reported by Jeanine Poggi in New York.

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