Innovation, upgrades drive retail sales

As consumers stare down record prices for gasoline and food, Wal-Mart's low-price image continues to trump Target's trendiness. ¶ Wal-Mart Stores Inc. announced Thursday that sales at stores open at least a year rose 3.9 percent overall -- 4 percent at its stores and 3.6 percent at Sam's Club outlets. The news sent shares to a four-year high of $59.80. Target saw a decline of 0.7 percent in same-store sales, a key gauge of a retailer's heath, in line with what it had forecast. Its shares -- which closed at $54.63 -- are trading where they did three years ago, and are down significantly from July highs of around $70.

While Wal-Mart is winning over the hearts and wallets of cash-strapped consumers, a report from Chicago investment firm William Blair & Co. found that the Bentonville, Ark.-based retailer is taking a page from Target Corporation's merchandising playbook. It's highlighting bestselling brands, making stores easier to navigate and enhancing the overall shopping experience.

"What we're seeing is more-intelligent merchandising at Wal-Mart," said Mark Miller, senior analyst at the firm. "There's more editing of certain categories and more high-quality items in other categories. We're not saying that Target's messing up. But there's more change going on at Wal-Mart, and that's helping them."

In its head-to-head analysis of the nation's two biggest discount chains, the analysts looked at nearly 1,000 items across 20 general merchandise product categories -- from baby strollers to cutlery sets to tennis rackets to denim jeans. Analysts compared Target and Wal-Mart stores that were less than 2 miles apart in three cities: a high-end market in Los Angeles, a middle-income market in the Chicago area and a low-income market in the Philadelphia area.

The report found that Wal-Mart has a decided lead over Minneapolis-based Target in the battle for merchandising momentum.

The approach, concluded the analysts, who have baseline data from studies done the past two years, could help Wal-Mart gain ground in consumer electronics and help it recapture lost market share in apparel and home furnishings, traditionally two of Target's strongest categories until consumers began cutting back on discretionary purchases.

Wal-Mart has spent the past two years focusing on electronics, fine-tuning displays and selection. Where years ago Wal-Mart didn't carry iPods, today it has increased its offering of digital music players. It has reduced its selection of flat-screen TVs by 8 percent.

As a result, Wal-Mart is gaining share in consumer electronics at a faster rate than market-leader Best Buy Co. Inc., according to the report.

On the flip side, Wal-Mart has pulled back on women's denim jeans, where Miller said the retailer had "overreached and had too much fashion, where it didn't have the credibility."

Wal-Mart also is in a better position than Target to grab sales from middle- to upper-income shoppers who are trading down in the challenging climate, even though prices on many items are within 1 to 3 percent, Miller said.

"It's interesting how competitive Target's prices are, but they don't seem to get full credit for that," he said. "Partly, if they plastered prices on signs all over the store, people would think it's cheaper quality. It's a fine line."

Target has been expanding food offerings at its non-SuperTarget stores, but compared with Wal-Mart it still carries a higher percentage of discretionary products such as clothes, bath towels and furniture -- items that also earn the retailer strong profit.

Soft sales will continue to put pressure on earnings, Miller said, but long-term, he believes that Target's "merchandising prowess" and strategy of making small and continuous changes rather than Wal-Mart's tendency toward the dramatic adjustments will make it a strong investment.

He believes both companies will outperform the market.

Some other findings from the survey:

• Wal-Mart is streamlining its offerings and making it easier for consumers to see differences in quality on such items as towels and sheets.

• Among the survey's 20 categories, Wal-Mart has reduced items by 11 percent, compared with Target's 3 percent.

• Target's average selling price relative to Wal-Mart's declined by 11 percent this year, compared with last year. This had less to do with Target lowering its prices in a challenging environment than with Wal-Mart substantially upgrading its assortment, the report said.

Jackie Crosby • 612-673-7335