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Two of the US' largest retailers, Target (TGT) and Wal-Mart (WMT) recently reported solid results, though performance diverged slightly during the third quarter. Target earned a stronger-than-expected $0.90 per share, an increase of 4.3% compared to the same period last year. Revenue was roughly in-line with consensus, showing 3.4% year-over-year growth, to $16.6 billion. Wal-Mart also exceeded earnings expectations, with earnings per share 11.3% higher at $1.08. However, revenue grew to a lower-than-expected $113.2 billion.

Though headline performance was similar, we saw Target increase same-store sales at 2.9% year-over-year in the US compared to a paltry 1.5% same-store sales growth rate at Wal-Mart. We think the divergence is likely the result of a healthier US economy; consumers are more willing to shop at the slightly more expensive Target as they feel relatively confident going into the holiday season. Dollar Tree (DLTR), perhaps even a slightly lower tier than Wal-Mart, saw same-store sales grow just 1.6% during its third quarter. Target should continue to be the main beneficiary of increased confidence going forward, but we also think "trading-up" could help boost Macy's (M) and maybe even Kohl's (KSS) performance.

While Target lacks a wholesale unit, we were a bit disappointed in same-store sales at Sam's Club, which grew just 2.7% ex-fuel. Given Wal-Mart's enormous scale and bargaining power, we'd think Sam's Club would be able to drive slightly better pricing and a better cost structure than rival Costco (COST). Clearly, that hasn't been the case, with Costco's same-store sales in its most recent quarter more than doubling that of Sam's Club. We think some renewed focus at Sam's Club could narrow the outperformance gap, but we haven't seen anything indicate that management is keying in on the situation.

Going forward, Target raised its full-year GAAP earnings outlook to an implied $4.51-$4.61 per share (was $4.20-$4.40) and its non-GAAP earnings outlook to $4.76-$4.86 per share (was $4.65-$4.85). Wal-Mart didn't raise its guidance, but narrowed it to the top end of its previously-issued range, at $4.88-$4.93 per share-a healthy increase over the $4.54 per share the company earned in the previous year.

Although we believe the recent results were strong, shares of both retailers are fairly valued and register a 6 on the Valuentum Buying Index (our stock-selection methodology can be found here). We don't prefer one firm over the other at this time, though Target might have better upside in the fourth quarter. Neither firm's valuation is compelling enough to warrant a position in the portfolio of our Best Ideas Newsletter.

Source: Wal-Mart's And Target's Results Diverge Slightly