Wal-Mart (WMT) and Target’s (TGT) low prices should make them perfect in bad times as families seek low cost but quality merchandise. But the U.S. economy is in murky waters. Increasing unemployment, decreasing GDP growth and inflation have made it difficult for retailers to survive.
For both companies, poor sales have put many investors in doubt. Are either investable?
Wal-Mart has just been greeted with another quarter of negative same-store sales while Target’s disappointing sales growth have driven down its share by 14 percent this year.
While both retailers have been significantly weakened, Wal-Mart seems to be the most likely one to improve its fundamentals as it expands overseas.
Target’s low-priced, chic designer wear has lost its competitive advantage as rivals have started stocking similar brands. Kohl’s (KSS), J.C. Penney (JCP) and Forever 21 all compete with Target for customers that are looking for stylish clothes at a low price. (Source)
With increasing competitors, Target has lost its image as the high-end cousin of Wal-Mart. This has damaged its margins and competitive advantage. Instead of addressing core issues to the business, their recent moves have sought to increase sales to slow the bleeding but fail to come up with a cure to its weakening economic moat.
Target is opening fewer stores these days while it has resorted to adding groceries to boost sales and adding a five percent discount if customers use a Target credit card. But these are temporary measures. The future of the company is in doubt if it cannot find a sustainable competitive advantage.
click to enlarge
In Wal-Mart’s battle for profitability and investors, it has the edge over Target as they expand outside of North America where growth has stagnated. Wal-Mart continues to grow its international operations in Mexico, China and Brazil. These emerging markets are high growth areas and will drive up Wal-Mart’s sales and the stock price.
Although China only accounts for 10% of Wal-Mart’s international sales, it is set to become one of the biggest retail markets globally for the company. Since 2007, Wal-Mart China has been maintaining double-digit growth.
By focusing on middle to lower income Chinese cities, Wal-Mart is capturing the rapid economic development of these towns and will grow accordingly with these lower-tier cities. (Source)
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.