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Oct 27, 2024

Walmart maintains the upper hand as it battles Target for Americans' wallets

In the battle for America's shoppers, Walmart (WMT) is still dominating Target (TGT). The world's biggest retailer continues to gain high-income shoppers in the face of sticky inflation while it

In the battle for America's shoppers, Walmart (WMT) is still dominating Target (TGT).

The world's biggest retailer continues to gain high-income shoppers in the face of sticky inflation while it expands its membership and advertising revenue. It's maintained its edge in value, offering grocery prices that are about 10% to 12% cheaper for an average basket of food, per Goldman Sachs analyst Kate McShane.

"The Walmart thesis is they're really among the biggest and best retailers out there," Telsey Advisory Group's Joe Feldman told Yahoo Finance over the phone. The company is "well positioned when times are tough, they're well positioned when things are getting better."

Walmart has done "a very good job going after a more affluent consumer and keep retaining their core customer" of lower- to middle-income consumers, Feldman added.

Groceries make up 60% of US sales for Walmart but just 20% to 25% of Target's sales, per Morningstar analyst Noah Rohr.

Go inside the fascinating leadership journey of Target CEO Brian Cornell

Target has been trying to turn the tide, announcing a plan in May to cut prices on 5,000 goods, which Bank of America analyst Robert Ohmes said "brought a positive momentum to foot traffic for Target."

This week, Target announced another price cut on 2,000 items ahead of the holiday.

"We believe that additional pricing cuts could spur additional traffic as we enter the crucial Holiday shopping season. Overall, we view this announcement as positive for Target's top-line and comparable sales ahead," Jefferies analyst Corey Tarlowe wrote in a note to clients.

Walmart isn't just competing with Target, but also supermarket chains, drug stores, and discount stores. In the latest quarter, its US same-store sales were up 4.3%, while Target's declined 2.0%.

Investors have awarded the results. Walmart's stock is up 52% in 2024, compared to Target's 5% gain and the S&P 500's 23% gain.

Walmart's edge in the food aisles continues to help counter soft sales in categories like toys, apparel, and electronics. "Discretionary has been down for the last 10 quarters," McShane said, with some signs of recovery at both retailers. In 2025, discretionary goods spending is expected to grow, which could be a boost for Target, said McShane.

When it comes to branching into other high-margin businesses, like memberships, e-commerce, and retail advertising, Walmart also took a head start.

The company launched its Amazon (AMZN) Prime competitor, Walmart+, in 2020 for $98 per year. Target only started its Target Circle 360 program this March for $99 a year. Both include same-day delivery, though Target has a $35 minimum.

Walmart+ touts additional perks, like savings on Paramount+ subscriptions, 25% off Burger King digital orders, $0.10 off a gallon of gas at over 13,000 stations, pickup for returns at customers' homes, and even free tire repair.

"What really happened with Target Circle is they didn't do a lot with Target Circle during the COVID years where they were over-performing everybody," Ohmes said. "They really had to get beyond COVID ... beyond the inventory issues they had in 2022, and that led to the clearance issues they had in 2023."

Now Target is trying to invest more aggressively in its loyalty rewards and paid memberships. It's offering Circle members an extra 30 days for returns, plus same-day orders from dozens of retailers through the Shipt Marketplace.

Last quarter, Walmart US saw its e-commerce sales jump 3%, boosted by store pickups and delivery.

"Pickup is growing faster than our in-store or club sales, and delivery is growing even faster than pickup. Delivery accuracy and speed continue to improve," CEO Doug McMillon said on the earnings call.

Target saw its digital sales jump 8.7% year over year. CEO Brian Cornell said its Drive Up and Target Circle 360 programs both grew sales in the low teens. He added that same-day services now make up two-thirds of its digital sales, with most customers opting for Drive Up, which brought in $2 billion in sales in Q2.

Walmart Connect, the company's advertising business, has also been blooming. Its US revenue grew 30% year over year, with advertising sales by online marketplace sellers up nearly 50%.

Target is trying to develop its own offering, Target Roundel. Cornell said it "continues to experience rapid growth based on the joint value it creates for both our guests and our vendors," with double-digit revenue growth. It's expected to grow in the "high teens" for the full fiscal year, after "more than 20% growth in 2023."

Neither retailer has shared exact revenue figures for its ads business. For reference, Amazon's ad unit boasted a 20% revenue growth year over year last quarter, bringing $12.77 billion in Q2.

Walmart's e-commerce marketplace is "getting very close to being profitable" at Walmart, said McShane.

"There's more buy-in from the investor base [in] the alternative revenue streams that Walmart's been going after... that they are faster-growing and higher-margin businesses that should drive better profitability for the company longer term," McShane said.

"Walmart's had a great year and they've been outperforming ... From a fundamental standpoint, all is going so well for them from a stock perspective. Plus, it doesn't look like we're done ... With the setup for this holiday season, everybody's searching for value. What better retailer gives value than Walmart?" Feldman said.

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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at [email protected].

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