As Wal-Mart's fortunes rise, target faces challenges

MMR, Jan 12, 2009

NEW YORK -- The fortunes of the industry's two largest discount chains were very different in 2008.

While Wal-Mart Stores Inc. saw its financial performance continue to improve throughout the year, the situation at Target Corp. got steadily worse as the year wore on.

One of the first signs that the two businesses were heading in opposite directions came early in the year when Target's comparable-store sales failed to beat those at Wal-Mart for the first time in two years.

Target's inability to top Wal-Mart's same-store sales proved to be a precursor of things to come.

With sales at its core retail business faltering and bad-debt write-offs mounting in its credit card unit, Target continued to turn in less-than-stellar results throughout the year.

In its most recent quarter, for instance, net income fell by nearly 24%.

Yet, even that was better than most analysts had predicted, and Target executives say they expect earnings in the current quarter to fall well short of Wall Street's projections.

"The increasing financial challenges and economic uncertainty facing American households continue to pressure our performance," president and chief executive officer Gregg Steinhafel said during a conference call following the release of the company's third-quarter results last month.

Still, he stressed, executives see some bright spots in the company's recent performance.

"Despite our soft sales, we were pleased with the operating profit performance in our retail segment as we continue to take a very disciplined approach to the management of our inventory and expenses," Steinhafel said.

Target's sales for the first nine months of the fiscal year actually increased 4.1%. Same-store sales, however, fell 1.5%.

Target's dismal results in the most recent quarter mirrored the company's performance for most of the past year.

After its sales slowed at the end of 2007 Target saw its fiscal year end on a sour note last spring when it reported that its fourth-quarter performance fell below expectations. The company's results in each of the first two quarters of fiscal 2008 were not much better.

Meanwhile, Wal-Mart has been soaring since the end of 2007.

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In its most recent quarter, for example, the world's largest retailer posted earnings-per-share growth that beat Wall Street's expectations as its bottom line rose 9.8% to $3.14 billion.

President and chief executive officer Lee Scott, who is set to retire next month, said the company's performance was particularly satisfying because of the uncertainty facing retailers globally.

"Despite economic difficulties around the world, we achieved solid sales and earnings growth, and we are optimistic about the upcoming holidays," he said. "Our sales results reflect the improved customer experience and sharper merchandising presentation at Walmart U.S., as well as higher traffic at Sam's Club among both Business and Advantage members. International remains Wal-Mart's fastest-growing business."

Despite moving in different directions this past year, executives at both companies remain optimistic about the future of their businesses.

"The current environment and our financial outlook have naturally reduced our appetite for investment in our business, and we have also temporarily suspended substantially all of our share-repurchase activity. At this time we have reduced our expected 2009 capital expenditures by about $1 billion," Target chief financial officer Douglas Scovanner explained after the company released its third-quarter results.

"Overall, we believe these related decisions will help to protect our liquidity and strong debt ratings as we continue to operate in a very challenging retail and credit environment," he said.