Boxing Match: Box Stores Battle It Out

Walmart and Target reported great earnings numbers. Target beat on top and bottom lines; 25.45B vs. 25.21B and $2.57 vs $2.18, respectively. Walmart also beat on their top and bottom lines; 169.3B vs. 168.52B and $0.67 vs $0.64, respectively. Both seem like the are going to to ride through this uncertainty comfortably. However, will they? If I had to choose a stock which one would I choose? Walmart, of course.

So what is going on? Why would I think that?

Consumers are definitely pulling back on discretionary spending, they aren't going on vacations anymore. Many of the vacation stocks have reported weaker guidance reflecting weaker demand. They aren't dining out as much anymore prompting some fast food chains to lower prices.

However, the consumer still needs the basics and they are still strong enough to buy them. Don't get me wrong, Americans are still feeling the pinch, and they are looking for bargains. They still want the most they can get for the lowest price.  Which is why retailers like Walmart and Target have been aggressively lowering prices to try to lure more shoppers; and for the most part, it has worked Target's traffic increased by 3% in the second quarter and Walmart reported increased sales.

So why do I like Walmart over Target? Target is cheaper based off earnings but Walmart has a better long term strategy; a strategy that they have developed for decades. Target is basically a higher end Walmart. They dedicate a much greater percentage of their floor space to higher margin items. And they have succeeded in cutting the price over over 5000 of their items and launch a private label of 400 items. Yet, this cut is on basic ítems with little profit margin. The strategy being: to attract customers with the low prices of the basics then hope that buy some of the higher margin items while they are in the store. And it seems like it is working for now. However,  I agree with analysts like Erin Lash of Morningstar in wondering how long Target can keep these strategy profitable.

As I have mentioned in a previous article, consumer credit has risen and so has credit delinquency rates, layoff numbers are rising, and jobless numbers were revised up for the year by over 800,000; indicating a weaker job market than initially believed. So it is valid to wonder if consumers will even look at big ticket items at Target.

On the other hand, Walmart has had a strategy of lowest prices possible with high product turn over. Walmart has dedicated more floor space to low margin, low price items. And Walmart can handle it. It is their entire business model. It is their brand. People go to Walmart exactly because they believe they can get lower prices. In their most recent earnings call, CFO, John Rainey, reports increased traffic in store and online with about 4% sales growth. And they have a better dividend while you ride out each quarter.

Better prices, better long term business model, better outlook, I like WMT. Walmart.

*This is solely my personal thoughts and opinions and not to be taken as financial advice. For that, please contact your financial advisor