Wal-Mart vs Target: Tale of Two Retailers

There is no doubt that consumers and the economy are under a great deal of pressure. Between cash-strapped shoppers and fiscal cliff worries, there is plenty of pessimism in the market. However, there are still some stocks bucking the downtrend.

The nation’s two largest retailers reported third quarter financial results on Thursday, and investors clearly picked only one winner. Wal-Mart (NYSE:WMT) announced a profit of $3.64 billion ($1.08 per share), compared to $3.34 billion (96 cents per share) a year earlier. Earnings beat Wall Street’s estimate by one penny, but sales came in lighter than expected. Total revenue increased 3.4 percent year-over-year to $113.9 billion, missing the $114.9 billion forecast from Thomson Reuters. Furthermore, domestic same-store sales rose 1.5 percent, well below the consensus estimate of 4.6 percent.

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Sales were negatively impacted from exchange rate fluctuations, but Wal-Mart clearly pointed towards a weak economy in the report. “Price will continue to be a major factor for U.S. customers over the holidays,” explains Mike Duke, chief executive officer. “More customers are part of a growing global middle class, looking for quality, value and a better life, and our EDLP model matters to these customers.” Chief financial officer Charles Holley also notes that, “Current macroeconomic conditions continue to pressure our customers.”

Target (NYSE:TGT), the nation’s second largest retailer behind Wal-Mart, also reported an earnings beat. Net income came in at $637 million (96 cents per share), compared to $555 million (82 cents per share) a year earlier. Adjusted earnings of 90 cents per share, easily beat analysts’ estimates of about 77 cents per share. Unlike Wal-Mart, Target also reported higher than expected revenue of $16.93 billion, an increase from $16.40 billion in the same period last year. Analysts expected $16.92 billion in revenue, according to Thomson Reuters.

The company was also more upbeat about the current business environment. “We’re pleased with Target’s third quarter financial performance, which reflects superb execution across each of our business segments,” said Gregg Steinhafel, chief executive officer of Target. “We are well-positioned to deliver strong fourth quarter performance by offering compelling merchandise and unbeatable value through initiatives like the Target/Neiman Marcus Holiday Collection, 5 percent REDcard Rewards and our new Holiday Price Match which allow our guests to shop at Target with confidence throughout the holiday season.”

After both retailers announced the results, investors tossed Wal-Mart into the bargain bin. Shares of the Arkansas-based company declined 3.60 percent, making it the worst performer in the Dow Jones Industrial Average, along with Verizon (NYSE:VZ) and AT&T (NYSE:T). In contrast, shares of Target closed 1.70 percent in the green. Wal-Mart and Target have been closely correlated for most of the year, but as the chart above shows, Target has been outperforming over the past month.

Looking ahead, Wal-Mart still raised the low-end of its full-year earnings guidance to $4.88 to $4.93 per share, compared to $4.83 to $4.93 per share. Last year’s EPS was $4.54. Meanwhile, Target provided a fourth quarter earnings forecast of $1.45 to $1.55 per share, including expenses related to its expansion into the Canadian market.

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