Target Remains Solid With Middle-Class Bargain Hunters

by Sarah Mahoney, Aug 22, 2007, 5:00 AM

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Just a week after Wal-Mart boo-hooed about how the uncertain economy was keeping shoppers away, rival Target Corp. reported a 14% jump in earnings for its second quarter, with total revenues climbing 9.5%, to $14.6 billion. That reflects a 4.9% increase in same-store sales for the quarter, with company execs predicting Target "will deliver strong sales and profit performance in 2007 and generate another year of profitable market share growth."

In the same quarter, Wal-Mart's comparable-store sales rose just 1.2% in the U.S., with company executives commenting that its shoppers were finding themselves with way too much month at the end of each paycheck.

So what explains the Dickensian difference between shoppers too poor to buy cheap undies at Wal-Mart, but finding plenty of cash for the newest Sonia Kashuk eyebrow kits when they shop at Target? Barry Ritholtz, director of equity research for FusionIQ, chalks it up to something he calls "retail slumming."

With all kinds of consumers looking to save money, "Target has just done a much better job of making a discount store appealing to middle-class consumers, from the brands it carries to the way stores are designed," he says. "The stores are a manageable size, and they're very attractive," he says. Wal-Mart stores, for the most part, "are garishly lit and depressing," he says. "Shopping at Wal-Mart is like making a trek through the mountains, while Target is bright and cheery. Consumers don't feel like they're slumming there."

On FusionIQ's ranking scale, based on earnings, stock price, institutional ownership, and money flow, Target scores 75 out of 100, while Wal-Mart comes in at 45.

Still, while Target remains optimistic about its sales and earnings guidance, Ritholtz is skeptical of any retail crystal ball at the moment. "These are very interesting times for the economy," he says, "and for anyone to predict what middle- to low-income shoppers will be doing for the next 12 months is just wild speculation."

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