Will The Target / Wal-Mart Divergence Reopen?

| About: Target Corporation (TGT)

If you put $1,000 into both Target (NYSE:TGT) and Wal-Mart (NYSE:WMT) 10 years ago, which do you think would be ahead?

Turns out to be Target, and by a wide margin. While your WMT would be up to $1,452, your TGT shares would be worth almost $2,192.

This may surprise you if you follow the two shares day-to-day. That's because over the last five years WMT's gains have been more than double those of TGT. But the divergence may be about to come back, and a look at Target's latest quarter shows why.

It's first useful to note that Target ends its fiscal year in January, so its numbers gave investors a first peek at how the raise in payroll taxes is impacting consumers. Wal-Mart has already told us it's not going to be pretty, asking "where are the customers?"

Could it be they're at Target? For the full year, Target revenues were up 5%, and adjusted earnings per share rose from $4.28/share to $4.76, with total revenue of $22.73 million meeting the street's expectations. The company's guidance about the future led to a sell-off after the earnings came out.

The company has made the best of its failures in online retail, launching a price guarantee that covers not only other stores but online merchants like Amazon.com as well. It has also redesigned its stores to go after a higher-end customer than those Wal-Mart attracts. If the tax hike is hitting lower-end consumers more than it's hitting higher-end consumers, as we can assume, then Target may continue doing alright even while Wal-Mart rolls over.

Wal-Mart has tried to fight its poor reputation with "Creative Class" consumers by surrounding them. I'll soon have three Wal-Mart SuperCenters within five miles of my home in Intown Atlanta - five years ago there were none. Target, on the other hand, has been in the area nearly a decade. Anecdotes aren't data, but the fact is that Wal-Mart is continuing to build in many intown neighborhoods, especially near prosperous areas where Target has long had a presence.

The question is whether these consumers are willing to do a little extra driving, either because they distrust Wal-Mart's policies regarding its workers or just want to avoid their down-market neighbors. TGT's long-term uptrend, which began around April, has been interrupted since October by worries about the "fiscal cliff" bit but it may now be poised to resume, especially in contrast with the action in WMT. Even with today's slight fall in the share price, TGT is up nearly 8% for 2013, double WMT's gains.

Any negative publicity for Wal-Mart is going to be good publicity for Target. It's the larger company that has the target on its back, while Target merely has to stay out of the way in order to gain. The divergence, in short, looks set to return for an extended stay.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.