Columnist Lee Schafer provides short takes on economic incentives and choices, business strategy and performance, market moves, what business leaders are saying and doing and other topics that pique his interest.

Big retail challenges not confined to a Target - Wal-Mart has them, too

Posted by: Lee Schafer Updated: February 28, 2014 - 4:34 PM

The news out of the big retailers headquartered in our region, Target and Best Buy, certainly reflects the kind of fundamental challenges each of them have in maintaining their traditional market position amid all sorts of competition including Amazon.com.

It is important to understand, however, that other traditional retailers have these challenges, too. Consider Wal-Mart Stores. 

Wal-Mart is the largest retailer in the in the world, and one of the things that has always distinguished Target in the investment community is that until Amazon.com came along, it was the only major player to really compete effectively against Wal-Mart.

While it doesn’t have a massive data breach to deal with, it was easily apparent in Wal-Mart’s results for its fourth quarter that it has many of the challenges that Target has. 

In its fourth quarter, comparable store sales were down in the U.S., and store traffic was down even more. It was the fourth consecutive quarter of declining comparable-store sales in the fifth consecutive quarter of the lower store traffic.

Weakening store traffic is particularly worrisome, because Wal-Mart can't sell more merchandise if customers don't even come into the stores. 

One response to these trends is a plan by Wal-Mart to increase its development of smaller stores, while trying to drive prices for products even lower and take out expense in its traditional retailing operations.

The analysts who follow the company are generally cautious on this strategic approach, because it’s far from clear that building out smaller stores and improving its websites is a growth strategy or just a way to divert customers from its own bigger stores.

And if cutting costs means reducing staff or otherwise making the experience of coming into a big Walmart supercenter just a little less appealing, well, it’s hard to see how this would help with store traffic and sales trends.

The senior analyst at investment research boutique Wolfe Research, Scott Mushkin, summed up his views on Wal-Mart’s plans for 2014 with the simple headline “More of what is not working.”

Looking ahead, he suspects that what Wal-Mart is doing now will put pressure on earnings per share growth and lead to further declines in returns on invested capital.

This is not a one- or two-quarter set of problems, either. Looking back over the past five years, the stocks of both Wal-Mart and Target have dramatically underperformed the S&P 500. But over that time period, Target’s has actually done a lot better than Wal-Mart’s.

As Wal-Mart is proving, the challenges in big company retail have not been that easy to meet. 

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