Takeaway: This whole WMT/TGT debate goes far beyond a simple EPS print. The bifurcation in investment spend suggests we’ll see this again and again.

Though we’re seeing fireworks in the daily trading ranges for both WMT and TGT this week – justifiably so, we might add – we think that the ever-widening gap in investment spending between the two is ultimately very bearish for TGT. We outline some compelling analysis below.  We said TGT was THE name to short this earnings cycle, and after the sell-off, we’re by no means tempted to cover. Investment cycles last much longer than a quarter.

WMT No Expectations VS. TGT High Expectations

The most glaring juxtaposition between the two prints this week from WMT and TGT, is the difference in investment each company is making, or in the case of TGT not making, in order to sustain/improve traffic over the long term. A quick summation of the two strategies…

  • WMT investing heavily in employees, e-commerce, stores, vendors, and now price. CEO McMillon took on the chin in the Fall of 2015 when he said that the company wouldn’t hit 2015 earnings levels again until 2019.
  • TGT cutting costs across the organization to free up $2bn in order to invest in people (they’ve added a lot of new faces in the C-Suite alone), e-commerce, stores, grocery, and of course…buying back stock. 

WMT isn’t just talking shop – it’s putting the dollars behind that plan. When we stack up the growth in SG&A/sq.ft. for the two retailers in the US over a 3yr time series, we can see that WMT started to step up the spend during the same quarter that Cornell started his tenure in Minneapolis. Since then we’ve seen a big bifurcation in spending levels, with the most recent data point showing a 900bps spread between the two when we normalize the TGT SG&A growth rate for the Pharma sale. Think WMT’s actions won’t affect TGT? Think again. To have it’s biggest competitor spending up big at the same time we’ve seen the biggest delta in NTM earnings expectations (chart 2 below) between the two makes the competitive pressure incrementally heavy for Cornell and his team to run the business with the long-term strat planning goggles (which he’s not doing), rather than managing expenses to hit a quarter.

WMT vs. TGT | More Than Meets The Tape - SGA FT

The Key Focus In This Chart = TGT EPS expectation ramp is trending above WMT’s to the greatest extent in over 20 years.

WMT vs. TGT | More Than Meets The Tape - NTM EPS WMT TGT

WMT Out-Trafficing TGT

Now in year two of investment mode, we’ve seen the fruits of WMT’s investment translate to better traffic. Now that the benefit has passed for TGT from the data breach at the tail end of 2013, we’ve seen WalMart traffic growth best TGT for the past 3 quarters. That’s during the same time period that TGT raised it’s long-term comp guidance to 3%+ (we still don’t understand that bizarre guidance decision). The guidance scoredcard for the upcoming quarter reads like this – WMT +1%, a 20bps acceleration on a 2yr basis. TGT -1%, a 110bps deceleration a 2yr basis. And weather, the Achilles Heel TGT attributed with the slowdown in comps in April and May was actually called out as a positive by WMT. Granted it was on the cost side, but the absence of any mention of weather as a headwind is notable.

WMT vs. TGT | More Than Meets The Tape - 5 19 2016 chart3

A Tale of Two Quadrants

The WMT SIGMA chart, which triangulates the P&L and balance sheet, showed the best sequential improvement of any company we’ve seen this earnings season. For WMT, that means a clean balance sheet and bright gross margin prospects with sales growth well ahead of inventory. The opposite is true for TGT – hence the negative guidance on gross margin ex. the pharma benefit.

WMT vs. TGT | More Than Meets The Tape - 5 19 2016 chart4

Put A Win On The Board For Target

It comes from the e-commerce operation. Though TGT is well off the 40% growth rate it promised 15 months ago and subsequently backed off from, it’s winning the e-comm battle relative to WMT. Each is in the basement of the competitive set with e-comm as a percent of sales in the 2-3% range, i.e. both companies have a lot of work to do. But, WMT simply can’t figure it out. Consider for a minute the fact that WMT sells 10mm SKUs online, Wayfair (0.4% the size of WMT) offers 7mm, and AMZN according to a few reports is close to half a billion. Where WMT wins in stores through its selection and price, it loses badly on the interwebs.

WMT vs. TGT | More Than Meets The Tape - 5 19 2016 chart5