In the battle for the consumer, Walmart has emerged as a clear winner with Wall Street analysts. The big-box retailer’s sales for the fiscal third quarter rose by nearly 9% and its earnings per share came in at $1.50, compared with the $1.32 expected by analysts polled by Refinitiv. In comparison, Target reported an earnings miss Wednesday, with profit that fell by about 50% in its fiscal third quarter. Target shares are down about 12% in afternoon trading on the report. Differences between the two companies’ business models may explain why their performance was so strikingly different. “Walmart’s positioning in retail is unique. It differentiated itself from competitors through its Supercenter format and its value offering across a multitude of categories,” UBS analyst Michael Lasser wrote in a note Tuesday. “Further, it’s experienced tremendous growth in eCommerce, and has solidified its positioning as a viable #2 player to Amazon in the space.” Lasser raised his price target to $170 from $158 on Walmart, implying 17% upside from Tuesday’s close. Consumers are gravitating towards value and trading down, buying less expensive versions of products, analysts noted, echoing Walmart’s comments on the earnings call. The retailer said its strength came from its grocery business, which is larger than Target’s, as consumers turned to Walmart to save money on food. About 75% of its market share gains in grocery came from households with income of $100,000 or more a year, Walmart said. That’s a customer that’s usually more associated with Target’s business. “WMT continues to report market share gains in grocery, which was the strongest category in the quarter, including a return to unit growth,” said Goldman Sachs analyst Kate McShane. “General merchandise softness continues to be linked to Covid-winner categories (CE, home, and apparel basics), although the category’s performance also improved sequentially.” Walmart’s general merchandise sales fell at a low-single digit pace, its chief financial officer, John Rainey, said on the earnings conference call Tuesday. General merchandise is essentially everything but grocery. “Results suggest the U.S. consumer is hanging in, but WMT is also benefiting from company specific trade down and these consumable traffic gains likely helped general merchandise,” said Wells Fargo analyst Edward Kelly. For Target, the softness in general merchandise is taking its toll. Higher prices are keeping consumers away from products they may not necessarily need right now. That differentiation between grocery and other products is also reflected in the latest retail sales data, which rose 1.3% in October from September and 8.3% from the year prior. Grocery stores saw an 8% year-over-year rise, while electronics and appliance sales fell 12%. Furniture sales were only up slightly. At Target, customer’s price sensitivity intensified during the last two weeks of October, its chief growth officer, Christina Hennington, said on a call with reporters. “It was a precipitous decline and, frankly, we’ve seen those trends in the early part of November as well,” she said. The retailer has made some progress clearing through its excess inventory, but the fiscal third-quarter brought higher-than-expected markdowns, Target said. That means a hit to profits. Inventory is still up 14% year over year. “Now the consumer is getting softer in a lot of those discretionary categories, which is going to take more discounting to get rid of that product and inventory in the fourth quarter,” Evercore ISI analyst Greg Melich said on CNBC’s ” Squawk on the Street .” Target’s third-quarter miss and lowered guidance in some ways calls into question the takeaway from Walmart’s earnings, which was that the retail environment was solid heading into the holiday shopping season, said DA Davidson analyst Michael Baker. “A key question is if TGT’s underperformance versus WMT is a function of TGT’s heavier emphasis on discretionary items, or if the difference is more on the execution side with yet another guide down this year for TGT,” he wrote in a note Wednesday. Walmart acknowledges the holiday season will be challenging. The retailer gave a more conservative outlook for the fourth quarter, anticipating comparable sales for the U.S. to rise about 3%, excluding fuel. That is below Wall Street expectations of 3.5% growth, according to StreetAccount. However, Walmart has also been resilient during economic downturns and periods of high inflation, Bank of America analyst Robert Ohmes pointed out in a note Wednesday. He raised his price target on the stock to $165 from $155 per share. “WMT has meaningfully/most consistently outperformed S & P over [the] past 5 recessions,” he said. “WMT has outperformed in high inflation periods, & grocers (like KR) outperformed meaningfully in the highly inflationary 1980-82 period (w/WMT now the largest grocer in the US, which was not the case in 1980).” — CNBC’s Michael Bloom contributed reporting.
