November 15, 2012 9:07 pm

Target / Walmart – a nice distinction

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Cosy domesticity versus more global ambition

Target is way, way cooler than Walmart. Snappy design? Better ads? Whatever it is, Target is the hip big-box retail chain. Sometimes, though, hipness is not enough. Between the market peak in late 2007 and its trench in spring 2009, Walmart shares outperformed Target’s by nearly 70 per cent. On the ensuing upswing, Target has been unable to make back the difference.

In the past month, though, Target has been trading flat as Walmart sags. Thursday’s results from the two companies accelerated the trend, as a slightly low sales number at Walmart drove its shares down while Target’s rose on better-than-expected profit. Perhaps Walmart shares had simply got ahead of themselves, and are reverting. It could also be that the biggest difference between the companies is starting to work in Target’s favour.

Homeward bound

Target is purely North American. Walmart is ever more global; more than a quarter of its retail space sits outside the US and Canada. And between 2006 and 2011 well over half of Walmart’s growth in square footage came from outside North America. This difference between the two companies explains almost all of Walmart’s edge in sales growth. During the same five-year period, average annual sales growth at Target has been a bit more than 3 per cent, about 2 percentage points less than Walmart as a whole – but all of 25 basis points less than Walmart’s US sales growth.

As the US economy suddenly looks like the best of a bad lot globally, investors may warm to Target’s cosy domesticity. All the more so following Thursday’s disclosure that Walmart’s internal probe into possible violations of US corruption law now includes Brazil, India and China – on top of already-disclosed enquiries in Mexico. The four countries account for more than half of Walmart’s international footprint. The chances that the investigations will lead to penalties big enough to do Walmart substantial damage is low. But they may signal that future international expansion will proceed at a much more measured pace.

Email the Lex team in confidence at lex@ft.com

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