Retail Market Musings: Wal-Mart, Target, B.J's and Costco

Why is Wal-Mart (WMT) trading near 5 year highs? Their same store sales were up a disappointing 0.7% versus consensus expectations of 1.0%, and although they raised earnings guidance, this was based on inventory control, not organic growth. Wal-Mart, highly dependent on imports from China, is vulnerable to margin pressure as inflation soars and the costs of quality control infiltrate manufacturing on the mainland. Although analysts are proclaiming that higher income folks are trading down to save money, Wal-Mart's core customer is being hit hard by job layoffs and higher food and gas prices.

If I were going to trade down to save money, I would go to the more stylish Target (TGT). So why isn't Target, which is trading close to 52 weeks lows, benefiting from this shift? Perhaps because Wal-Mart has more emphasis on non-discretionary items, i.e., groceries, a notoriously low margin sector.

Warehouse clubs are benefiting from a bunker mentality. BJ's (BJ) and Costco (COST) reported solid same store sales as shoppers "hunker down" and buy in bulk as a hedge against rising prices, but this surge is likely to be short lived as consumers find it takes time to work through cases of paper towels and boxes of batteries.

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Comments

[cranky old investor]

trading down - target is not a "down-trade" to many; much of target's goods are cheap-chic, not basic necessities. Walmart, on the other hand, sells stuff that people might need - like milk, cereal, diapers.

equating the two chains is a fallacy that those on wall street - with little access to or inclination to shop in either store - fall into on a regular basis. To many who are on the low on the socioeconomic ladder - including many who've recently landed there - Walmart is where you do your shopping for necessities, Target is a place to splurge.

[jala]

Gee, last time I was in Target they had milk, cereal and diapers - and their price was lower on 2 of them than Wal-mart! I confess that I did splurge, however. I bought some toilet paper, too!

[BlueOkie]

I own TGT. I shop at both WMT and TGT. I go to WMT for price. I go to TGT for a step up in class.

[SayWha]

Perhaps Target is not doing so well because their credit card is doing so poorly. Only sub-prime borrowers would consider paying Target's 27% interest. All other consumers have more sense than that.