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Sometimes you just hitch your cart to any old horse to see how it runs. If it turns out that your cart is excellent for the horse, well that's good, too. Neiman Marcus has just latched on to the Target (NYSE: TGT  ) horse, and it looks like the pair will be off to the races in time for the holiday season. It looks like a great deal for both brands. So the only real question is: Why the heck did they get together in the first place?

Like minds think alike
According to Neiman Marcus, the customer overlap between the two brands is bigger than an outsider would think. Based on internal company reports, the average customer age varies by eight years, though median income is vastly higher among Neiman Marcus shoppers.

The advantages for Neiman Marcus are clear. With only 77 stores, the company has limited reach. That drops even further when you consider the kinds of people walking into the stores. By working with Target and its 1,763 stores, Neiman Marcus gets a potential foot into almost every door in America. As an added benefit, Target has the resources to produce the designer articles that will be sold in stores, something Neiman Marcus has never had to worry about.

For Target, the effect is more subtle. The company relies on its cheap-chic aesthetic, and has built a strong brand around that idea. Same-store sales grew 5% last quarter, which was excellent compared to its peers. In fact, Target's decision to work with Neiman Marcus looks like a stroke of genius, in light of how the retail segment is doing overall.

The competition
(NYSE: WMT  ) is the competitive frontrunner. Last quarter, same-store sales grew 5%, in line with Target. This would have been higher if international numbers were included, but Wal-Mart only includes U.S. store sales in its reporting. The international segment accounted for 29% of overall revenue, and increased its revenue by 15% last quarter.

Kohl's (NYSE: KSS  ) is lagging behind, and the company had flat same-store sales last quarter. Overall revenue increased 2%, as the chain added a few new locations. From my perspective, Kohl's would have been the closest fit for Neiman Marcus outside of Target

J.C. Penney (NYSE: JCP  ) continues to be the sucker's bet in retail. Last quarter, same-store sales dropped 19% as the company's new "fair pricing" model bombed with customers. Neiman Marcus took a clear cue from the rest of the investing world, and opted to give that hot mess a miss.

The bottom line
Even if you're not interested in the semi-ethereal "good for the brand" argument, Target has some clear incentives to working with Neiman Marcus. While the high-end retailer went private in 2005, it still publishes most of its financial information. All I can think to say is, "Well done." In the nine months through the end of April, revenue was up 8%, with net income up 63% over the same period last year.

All of this is great news for Target. While products carrying the dual Target/Neiman Marcus label obviously won't carry quiet the same cachet as a pure purchase, they'll have some impressive designers behind them. The announced line-up includes Oscar de la Renta, Diane von Furstenberg, and 22 other designers.

While there's always something to be said for a turnaround play, Target seems to be an intelligent, ongoing investment. The new partnership isn't going to help double the stock price, but it's a clear sign that Target management understands its customer base. I think this is the first of many team-ups that will ultimately keep Target at the head of the retailer pack.

Wal-Mart is the second-most-interesting play, for me. Overseas expansion still represents a huge opportunity, and it's already paying off. However, before you invest, make sure to check out the Fool's special video report, "The Future Is Made in America." It explains how manufacturing is changing, and who's poised to take advantage of a new disruptive technology. It's free for readers, so get your copy now.

Fool contributor Andrew Marder doesn't own any of the stocks mentioned in this article. He thinks of J.C. Penney as the way to get from the parking lot to the actual mall. Motley Fool newsletter services have recommended creating a bull call spread position in Wal-Mart Stores. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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Related Tickers

10/21/2016 12:21 PM
TGT $68.27 Up +0.56 +0.83%
Target CAPS Rating: ***
JCP $8.85 Up +0.19 +2.19%
J.C. Penney CAPS Rating: *
KSS $44.96 Up +0.94 +2.14%
Kohl's CAPS Rating: **
WMT $68.40 Down -0.33 -0.48%
Wal-Mart Stores CAPS Rating: ***