Why Target is an Investment and Wal-Mart is a Trade

Wal-Mart (WMT) took a few good steps these past couple of days to bolster both its crumbling image and shareholder confidence. The company indicated it would scale back its new store openings and concentrate on the sometimes shabby appearance of its existing stores. Also, the company would increase its share buyback program to instill greater investor confidence. Both good and timely moves.

By cutting back on new store openings this year and the following three, Wal-Mart will in essence save $1.5 billion per year on capital expenditures. It's a strategic move and one that will hopefully allow it to re-focus its corporate resources on trying to lift the all-critical metrics of same-store-sales. April same-store-sales was the worst in Wal-Mart's history. The share buyback will retire less than 3% of Wal-Mart's outstanding shares but give earnings per share a slight lift. It's all encouraging and dandy, but trying to grow this $210 billion market capitalization company will be eventually frustrating as only so much can be squeezed from this rock. The company will need to rejuvenate its customer's perception of the stores and get them to spend more money on larger ticket items. The improving story gives the stock a chance to rise up to maybe $60 in the next 12-18 months. It's a trade going forward.

WMT 1-yr chart

Target Corp. (TGT), on the other side of the spectrum, is a real investment and a real growth story. Target Corp. reported an excellent quarter ending April 30th, with its proprietary credit card operation representing nearly 60% of the profits. The Target Visa card is gaining widespread customer acceptance and comfort. Target has almost 1700 stores nationwide and the capacity to double that store base over the next decade. It's a growth story with multiple legs to it.

Target has captured the unique position of having attractive fashions at a reasonable price and Target appeals to almost every demographic segment. People like shopping at Target as the lighting and general environment are pleasant and make for a good experience. The stores are clean and cheerful and the selection of products is second to none.

Target currently has a market capitalization of $54 billion and has a clear pathway to increase that value to $125-150 billion over the next several years. The credit-card operations provides the high margin growth to its earnings as it fortifies customer loyalty. With the room to double the store base before reaching any point of saturation, the credit operations will only become bigger and far more profitable. The earnings leverage in the credit card industry is massive once fixed costs are covered. It also provides the internally-generated cash flow necessary to allow for the bricks and mortar expansion without incurring additional corporate debt.

No question, Wal-Mart has taken some aggressive, necessary steps to help build shareholders confidence, but it is not to be confused with a bona fide growth story. It's a down and out story that has some near term upside before possibly hitting the wall again.

Target is a bona fide growth story with both the merchandising expansion and the credit card operations generating earnings growth for the years to come. New money looking for retail exposure should favor investing in Target.

TGT 1-yr chart

Disclosure: none

Comments

[Graig Stettner:]

I have yet to talk to ANYone who actually enjoys shopping at Walmart. (The opposite is true at TGT. The second TGT paragraph, above, is spot on.) The JPM analyst and others who gush over the company's new-found capital discipline have, I venture to guess, yet to shop at Walmart on any sort of regular basis.

2007 Jun 06 08:27 AM