If the Election Were Today, Wal-Mart Would Win!

The showdown between Target and Wal-Mart is becoming ever so interesting!

The two retail giants present a fascinating dichotomy.

While Target struggles to maintain an over 6% lead over Wal-Mart (NYSE: WMT) in profit margin, Wal-Mart struggles to stay above the water from the inescapable e-commerce threat from Amazon.

While Wal-Mart closed all its small-format stores in major cities, citing higher cost of real estate and the larger population in more rural areas, Target (NYSE: TGT) plans to grow its small store portfolio. The irony is that both companies believe in the same model — smaller locations allow the chains to operate in downtown locations, less intrusive to neighborhood, where a full-size store would be cost-prohibitive.

While Wal-Mart has been struggled to find the “sweet spot” to match the right prices and quality of products to carry, Target has returned to smaller, healthier, high-end stores with higher profit margins.

By investing $2 billion in labor, healthcare, and employee training for next two years, the benefit is immediate. Wal-Mart shareholders have been rewarded +5% for last 6 months. Citing “not recognized by the market,” Target’s strategic shift was met with -4% returns.

While Target has been the ‘hip Tar-Jay,’ it advertised fashion and experience ahead of its discount prices. Shoppers are expecting to pay higher prices for better products. More than four times of Target’s size, Wal-Mart is the low-price retailer king.

Target has solid market share in the shoppers’ bigger stock-pile trips for customers, but the low price competition from Wal-Mart and the Amazon prime will make Target’s stop-by trips less attractive.

This would suggest that both retailers have been properly placed. Wal-Mart has the big data to know that, for the store locations close to lower-income areas, pricing is the key point to attract those shoppers for their additional discretional spending. For stores nearby middle-upper income area, the product quality and favorable in-store experience will drive the repeat traffic.

Only time will tell who made the right move!

The reality is that, for last 3 years, the retail industry’s same store sales grew around 3.5%, compared to the ecommerce’s 16%, while Amazon grew around 30%. Wal-Mart is the third in online sales following, by a long shot, Apple and Amazon. In 2015, Amazon’s stock surged more than 200%, the best year ever, while Wal-Mart’s stock dropped more than 30%, the worst year ever. Like it or not, “Amazon is the new Wal-Mart.”

The real challenge now is whether Wal-Mart can strategically align its investment for ecommerce with its investment for in-store execution. Walmart can use its scale to compete on price to regain or maintain market share vs. Amazon, but Target cannot compete as easily.

While Target’s ecommerce growth is 16% leading Wal-Mart’s 12%, the wild card is Wal-Mart’s recent acquisition of Jet.com, which has been a direct private company competitor to Amazon. The acquisition is considered Wal-Mart’s strategic move to combat Amazon and close the gap with Target.

Target has its own issue with Amazon. Amazon is seeing explosive growth in grocery and consumables, which accounts for 45%-50% of Target’s business and are likely the categories feeling pressure from the weakening stop-by trip dynamics.

Both companies are “dividend aristocrats” that increased dividends every year more than two decades. It is a wash on this end.

In 2015, WMT was down -30% and -1.73% in 2016, while TGT -1.81% and -3.43%, respectively.

That being said, “forward-looking” valuation models suggest that WMT has a fair value around $80, approximately 9% undervalued. TGT has a fair value of $74 with 7% undervaluation.

If the election were today, Wal-Mart would win!

Disclaimers: Roland George Investments Program at Stetson University does not have positions in either WMT or TGT. We don’t have positions in either GOP or DEM.

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