Wal-Mart Beats...Yawn

Includes: TGT, WMT
by: Todd Sullivan

Like McDonald's (NYSE:MCD), this isn't really news anymore. Should the company ever miss, only then will it be.

Wal-Mart (NYSE:WMT) reported its sales and earnings for the quarter ended April 30, 2008. Net sales for the first quarter of fiscal year 2009 were approximately $94.1 billion, an increase of 10.2 percent over $85.4 billion for the first quarter of fiscal year 2008. Net income for the quarter was $3.022 billion, an increase of 6.9 percent from $2.826 billion in the first quarter of fiscal year 2008. Diluted earnings per share for the first quarter of fiscal year 2009 were $0.76, up from $0.68 per share in the same prior year quarter.

In early April
I said:
A common refrain out there is that people are trading down to Wal-Mart from Target (NYSE:TGT). I happen to disagree. While I think some people are indeed trading down, the changes the company has made to scores of locations, it online dominance and its new "Save More, Live Better" ad campaign have more to do with it. But, for arguments sake, lets go with "trading down".

The wealth loss in the US is due to one thing, housing. People still have jobs as the unemployment rate is low and wages are actually rising. It is the value of their homes, their largest expense, and the fear that illicits are creating the current environment.

Now, since housing prices have fallen at the fastest rate in almost 100 years, this wealth deficit has been dramatic. It also means that a recovery to pre-bubble levels will take years, maybe decades. People who bought homes in the last 3 years have a negative equity or, now not enough to tap for loans. Sensing this, they will spend accordingly.

If this is the reason people are running to Wal-Mart rather than the other retailers, one can only assume this trend will be in effect for the foreseeable future.

For shareholders of Wal-Mart, that is indeed good news. For holders of Target (TGT), JC Penny (NYSE:JCP), Macy's (NYSE:M) and others, it means rapidly shrinking margins and the necessity to redefine themselves.

As each quarter is put in the books, this appears to not only becoming fact, but the pace at which is doing so is accelerating. Target is already out there stumping about their prices and the "value" it gives shoppers rather than focusing on its trendy image as it has in the past.

Even Bill Ackman, who holds a 10% economic interest in the company, acknowledged this on CNBC recently when he said "because Target has bright clean aisles, it is perceived as being more expensive". While I think that is too simplistic a reason, it is true it is perceived that way. It isn't because it is cleaner (new and refurbished Wal-Mart's are just as nice), it is because Wal-Mart pounds their value proposition into our heads ever day, unlike Target. Target, until recently has focused on its fashion and people equate fashion with expensive.

This isn't a trend one ought to expect to reverse anytime soon.

Disclosure: Long WMT, MCD.