Can Target Do For Food What It Has Done For Apparel?

May 25, 2015 10:45 AM ET  |  About: Target Corporation (TGT), Includes: WMT

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)

Summary

• TGT’s apparel business continues to grow like a weed.
• TGT’s food business, however, has been underperforming the average.
• TGT’s answer is to focus more on high-end foods and leave the low-cost, low-margin stuff to WMT.

How can Target Corporation (NYSE:TGT) possibly compete with the bigger low-cost, low-price leader Wal-Mart (NYSE:WMT), I've always wondered? The answer is it can't on price but it can on quality and perception. As a frequent customer and investment observer of both, I must admit I am quite impressed with TGT's execution and strategy.

TGT reported fiscal Q1 results on May 20. Adjusted EPS jumped 19.6% year-over-year to $1.10, beating the estimate by $0.07 along with same-store sales increase of 2.3% and digital channel sales showing a spike of 37.8%. TGT saw growth in both traffic and average ticket. Of particular note was the growth among apparel and home goods.

TGT at least in my view has always been the "premium discount retailer" in terms of apparel. I have no problem going there to shop for, try on, and purchase say a business casual outfit yet at say Wal-Mart I would only do that in a town where I wouldn't risk running into somebody I know. TGT, at least perception-wise, is a serious step up in class.

EVP Kathryn A. Tesija said during the conference call, "Across the rest of our assortment, food comps were just below the company average." CEO Brian C. Cornell's response for this was:

"We are just beginning to reinvent our food assortment and presentation. We have an opportunity to drive more traffic and sales in this critical area of the store by becoming more specialized in our assortment, more focused on healthy options in support of wellness. We're testing potential assortment and presentation options and this year we plan to study the guest response to potential changes before determining what we'll rollout more extensively next year."

I take this to mean instead of competing with Wal-Mart, for example, head-on with price (which is near impossible), TGT intends to compete on product offering, by offering higher-end food like it does with apparel. Anecdotally (or not?) as a frequent guest of both WMT and TGT, I purchase many basic household goods at WMT but also head over to TGT for others. Basic staples such as ketchup, mayonnaise, and toilet paper I get cheap at WMT, but for higher quality goods I'm off to TGT.

TGT is looking to more healthful food assortments while sacrificing variety. I like the way Seeking Alpha Contributor Orange Peel Investments described it as the "Fast Causal" of retail. CEO Brian C. Cornell described this initial work as "localization and personalization" regarding food. It may work not just in the products but in the overall perception of TGT as a somewhat higher-end retailer, which could help sell all of its other products.

In the end, TGT and WMT coincidently have a similar price per share, dividend yield, and analysts' expected EPS for next fiscal year. Between the two, if I had to pick one, I would ditch WMT for TGT.