Photo: Target | iStock
Why Did Walmart Outperform Target in the Second Quarter?
Same-store sales at Walmart’s U.S. stores climbed 6.4% in the second quarter while rival Target’s declined 5.4%, although both discounters warned that consumer spending remains challenged.
Doug McMillon, CEO of Walmart, said on a call with analysts, “Jobs, wages, and pockets of disinflation are helping our customers, but rising energy prices, resuming student loan payments, higher borrowing costs, and tightening lending standards, and a drawdown in excess savings mean that household budgets are still under pressure.”
Brian Cornell, Target’s CEO, told analysts that inflation on food, beverage, and other essentials was “causing these categories to absorb a much higher portion of consumers’ budgets. In addition, consumers are choosing to increase spending on services like leisure travel, entertainment, and food away from home, putting near-term pressure on discretionary products.”
Cornell further said the rollback of pandemic-relief boosts, including stimulus payments, enhanced child care tax credits, and the suspension of student loan payments, “presents an ongoing headwind that consumers continue to manage.”
Also playing a role in Target’s underperformance — its first decline in six years — was a “strong reaction” to its pride assortments that led to some conservative shoppers vowing to boycott the store.
Walmart is believed to have benefited from its high penetration in grocery, representing 59% of sales at the Walmart U.S. segment in 2022 versus 21% at Target. Many also believe Walmart benefits from a stronger value message that drives share gains across income demographics. John David Rainey, Walmart’s CFO, told analysts, “Our value proposition is resonating with customers.”
Target lowered its full-year outlook as it also expects mid-single-digit comp declines in the back half of the year due to continued softness in discretionary purchases, with the upcoming resumption of student loan repayments further straining consumer spending.
Walmart raised its full-year forecasts due to the above-plan performance. McMillon said he was particularly encouraged that general merchandise sales trends improved sequentially in the quarter and that back-to-school selling is off to a strong start. He said, “Typically, when back-to-school is strong, it bodes well for what happens with Halloween and Christmas and GM in the back half.”
Discussion Questions
DISCUSSION QUESTIONS: What do you think was behind Walmart’s outperformance and Target’s underperformance in the second quarter? Should Walmart’s success encourage optimism in the chain’s long-term fundamentals and Target’s weakness cause concern?
Poll
Loading …BrainTrust
Nikki Baird
VP of Strategy, Aptos
Mark Ryski
Founder, CEO & Author, HeadCount Corporation
There are a few main reasons for the difference. Walmart plays more heavily in essentials (around 56% of its business versus Target at 29%) where inflation is flattering the numbers and, despite price rises, volumes are holding up better because people need to buy the basics. Walmart also has a low-price position versus Target’s good value position: the former is more compelling in the present environment, which is why Walmart is attracting new shoppers in a way that Target isn’t. Finally, Target’s past success has been driven, in part, by impulse purchasing and treating in discretionary categories: this dynamic has waned as consumers have cut back. There are some smaller differences too: Walmart’s online growth is benefiting from its website and app refresh; Target has a digital refresh planned but it is not yet implemented. Walmart is also helped by its powerful advertising results. And Target suffered, albeit modestly, from the challenges around Pride Month. All that said, compared to the Q2 pre-pandemic period of 2019, Walmart US revenue is up 30.2%, and Target’s revenue is up 34.1% so, despite the present differences, both retailers are medium-term winners.
Groceries are the ultimate recurring revenue stream, and Walmart’s product mix of 59% grocery vs. only 21% at Target is a big reason for the difference in performance. People need to eat, and with Walmart’s strong grocery offering and low-cost positioning, it’s not hard to see why the outcomes were so mush better at Walmart than Target. What was less obvious is the negative impact from the conservative boycott resulting from the pride assortments. Walmart has and continues to perform very well regardless of the economic tumult, and I expect that it will continue to do so. That said, both Walmart and Target need discretionary spending to improve, and when it does, both retailers will do even better.
You can sum it up as, Target relies much more on “nice to have” while Walmart relies much more on “need to have.” Coupled with what seems to finally, finally be an impact on consumer spending – trading down seems to be for real this time around – it’s easy to see why Walmart might win while Target (who theoretically plays for the same shoppers) might lose.
The traffic driven by Walmart’s grocery business is then the driver for all kinds of other purchases. And Walmart’s prices make it easy to shop and buy across multiple categories. They might not be fashion leaders, but that’s OK. They are price and value leaders.
The scarier part is the story emerging in the rest of the retail landscape. Target’s softness is now echoed, as of this morning, by Dick’s Sporting Goods profit warning and Macy’s -7% comps. It’s of little comfort that those comps were slightly better than expected. Then consider record credit levels and rising delinquencies. Walmart might be on a roll for months to come.
Many true things can be said about the differences but it rolls up to one big takeaway: Walmart is far more diversified than Target and therefore has more wiggle room when segments of its business are challenged. This diversification manifests across Walmart’s physical formats, categories, solutions and products, mix of national and private brands, channels, and global digital and physical footprint. Dare I say that they are no longer direct competitors?
In a survey my company ran in May, 98% of consumers expressed a medium to high level of concern about the economy, 92% were modifying their shopping behaviors (primarily putting more effort into saving money, especially on essential items). For 38% of consumers, that extra effort included changing where (the retailer) that they shop and trading down to less expensive brands, including private label. Walmart not only wins on value perception, but they win on brand selection and their Great Value private label brand has strong equity. Target is and will have to continue to use promotions very strategically to get shoppers in the store.
Walmart’s leadership in grocery and value led to spectacular results.
EDLP and Walmart+ benefits attracted more consumers to buy big baskets more often.
Shoppers’ reactions to Target’s “Pride Month” assortments captured the headlines, but the pullback on discretionary spending is more relevant. As my BrainTrust colleagues point out, Target is much less dependent on grocery and commodities than Walmart, and this kind of pullback on apparel and soft home has happened often in the two companies’ history.
It’s not just continued inflation on food and gasoline that is pinching consumers; new home buyers (if they are lucky enough to find a house) are paying 7% instead of 3% mortgage interest. And while inflation has “cooled” to 3% year-over-year, prices are still high vs. 2021 and shoppers are cutting corners where they can.
Price. When people feel the pinch, they go to Walmart. Target is considered a little more of a splurge. And their merchandising is so good that you’re more likely to walk out with more than you went in for at Target, and at a higher price point. Personally I think this is a quarterly glitch, not a trend. Target is still providing a great experience and delivering on their customer promises.
Lots to consider at this point.
My attention goes to the improvements Walmart has made to its stores.
From housekeeping, to grocery, to instock, WMT is now a viable alternative to TGT.
It is no longer trading down to solve the shopping problem.
This quarter’s performance must be a fascinating waterfall chart.
Doesn’t Walmart ALWYAS “outperform” Target ?? Certainly from the perspective of revenues it does…something that is (all too) often overlooked. But in the sense that I think this question was meant: one thing that was widely reported in the popular press – and ignored here, for whatever reason , was negative response to Target’s ‘Pride’ promotion(s); I don’t know how much it explains shortfalls – I’m thinking the effect has been somewhat exaggerated – but it’s (still) likely a part of it. Beyond that, different product mixes – grocery is a big part of Walmart, much more than Target – make it hard to compare directly.
When it comes to household goods and popular products, Walmart outshines Target by offering a wider selection. Additionally, Walmart is known for providing great value and deals that are especially important during times of inflation. With a focus on freshness and an improved shopping experience, more and more shoppers are choosing Walmart as their go-to destination. Over the years, Walmart has proven its ability to overcome challenges and remain successful.
Walmart has always been the go to for essentials when budget is tight. Target focuses on value on entertainment and lifestyle products which is more discretionary and affected more by inflation. When consumers are facing inflation pressure plus less optimistic about future income, Walmart is more the go to than Target.