Target May be Poised to Outperform Wal-Mart

As Target embarks on a new growth phase, retail experts have been marveling at the concept: Target merges “discount” with “chic.”

Tim Arango, a reporter for TheStreet.com, noted in a Dec. 10 column on that Web site that the plan is working and that Target has a higher profit margin on goods (30 percent) than Wal-Mart Stores Inc. (21 percent).

With a 124,767-SF Target under construction in Fayetteville’s CMN Business Park II, it’ll be interesting to see if sales at the Target store will affect those of the Wal-Mart Supercenter a half mile to the north.

Arango wrote that Target has a number of advantages over its discount rivals, including Wal-Mart. Besides the higher profit margins, Target has more room to grow.

Wal-Mart and Home Depot have saturated the market in the United States. As a result, Wal-Mart has focused on growth overseas and on its Neighborhood Markets, 40,000-SF stores that can more easily be located in urban areas.

But Target appears to be aiming at a more affluent concept than Wal-Mart.

“By offering high-quality products at a reasonable price, Target appears to define value for many shoppers,” Arango wrote.

As a result, for some people Target appears to be a better investment. Shares in Target are up about 21 percent on the year, while Wal-Mart has risen just 6 percent. And Target shares are cheap compared to Wal-Mart’s, some analysts are saying. Target shares trade at 22 times next fiscal year’s estimated earnings, compared with 32 at Wal-Mart, according to Thomson Financial/First Call.

Walter Loeb, a longtime retail consultant, in his most recent monthly newsletter, the Loeb Retail Letter, told clients that Target shares have more growth potential than Wal-Mart’s. Other investors scoff at the notion that Target shares are undervalued, though.

Analysts expect earnings at Target and Wal-Mart to grow at roughly the same rate — 15 percent for Target, 14 percent for Wal-Mart. But Target’s estimates don’t factor in an expected boost from credit operations. That could add 10 cents, or about 6 percent, to next year’s EPS estimate, $1.68.