What Can Target Learn From Wal-Mart's Retail Game?

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In early November, reports emerged that Target Corporation TGT was looking to shutter a dozen stores by February next year. A spokesperson for the company commented that this was part of an annual process aimed at closing underperforming locations. But Zacks Rank #3 (Hold) Target's decision serves to illustrate the dilemma facing the retailer and its competitors and the need to react effectively to new challenges.

Brick & Mortar's Challenges

It's not that it's been a bad year for retail overall. According to data from the Department of Commerce, retail sales registered a year-over-year increase of 3.9% up to October. Of course, not all sectors have managed to latch onto gains. The challenges faced by brick and mortal retail have received wide coverage. But the condition of department stores is particularly acute.
 
Over the same period, department stores witnessed a 2.8% decline in sales. The challenges faced by the department store segment are reflected in the fortunes of brands such as Macy's, Inc. M and Sears Holdings Corporation SHLD, which have had to close a number of stores in response to the decline in shopping traffic.

Wal-Mart Aces Results, Target Lowers Outlook

Standing head and shoulders above the rest of the competition is Wal-Mart Stores, Inc. WMT, which reported solid third quarter earnings and raised its view on Nov 16. The stock has a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

The company raised its bottom-line view for fiscal 2018 and now envisions adjusted earnings in the range of $4.38-$4.46 per share, as compared with the prior expectation of $4.30-$4.40. (Read: Walmart Stock Gains on Solid Q3 Earnings & Raised View)

Target also reported strong third quarter results, but shares of the Minneapolis-based company declined 4% in pre-market trading on Nov 15.  This is because the year-over-year decline in the bottom line and management's commentary about highly competitive environment in the fourth quarter was not well perceived by investors.
 
Target now envisions fourth-quarter earnings in the band of $1.05-$1.25 and fiscal 2017 earnings between $4.40 and $4.60 up from $4.34 and $4.54 per share, projected earlier. (Read: Target Falls Despite Q3 Earnings Beat: Here's Why)

What did Wal-Mart Get Right?

So what exactly did the iconic discount retailer get right? After years of sluggish sales, Wal-Mart got its act together primarily through a two-pronged approach. Firstly, it has invested billions of dollars in technology in order to fortify its e-commerce presence. And its success on this front can be gleaned from e-commerce sales recorded between Black Friday and Cyber Monday this year.

Wal-Mart's share of online expenditure during this period has jumped to 10%, more than twice as much as the proportion recorded a year ago. Much of this success can be attributed to its acquisition of erstwhile Amazon AMZN competitor Jet.com last year for $3 billion.

Human Factor Holds the Key

Further, in order to facilitate delivery, Walmart recently acquired a delivery startup Parcel, Inc., which is a last-mile delivery service and specializes in same-day delivery for perishable and non-perishable products. Other than this, the company's Walmart Pickup program enables customers to place orders online and then pick them up at a store for free.

Even though the spotlight is squarely on Wal-Mart's online efforts, the largest portion of the retailer's new found vitality has come from its strong investments in people. Around two years ago, Wal-Mart decided to invest $2.7 billion in higher wages and training, a move which did little to cheer market watchers. But it's one that has paid off, helping the shares close in on the $96 mark post third quarter earnings.

Did Target Miss a Trick?

Firstly, Target has put in a considerably better performance over the last six months. The company's strategic endeavors and turnaround plan has helped it gain 7.9% over the last six months, though it has still underperformed its larger rival and the broader market over this period.

 
Amazon.com, Inc. AMZN: Free Stock Analysis Report
 
Wal-Mart Stores, Inc. WMT: Free Stock Analysis Report
 
Target Corporation TGT: Free Stock Analysis Report
 
Macy's Inc M: Free Stock Analysis Report
 
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