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Wal-Mart vs. Target: Which Offers Lower Prices?

Wal-Mart Stores (NYSE: WMT  ) is highly focused on winning in price versus its competitors. In other words, it wants to offer lower prices than a competitor like Target (NYSE: TGT  )  in order to drive foot traffic and sales. Wal-Mart has been effective in its quest, but Target has an edge in one area, and it's an area that has the potential to grow.

Price differential
Last June, prior to Target's data breach, Kantar Retail found that Target was 2% more expensive than Wal-Mart. Therefore, Target customers should have planned to "Expect More, Pay More."

Of course, Target's prices are still more affordable than what you will find at most retailers. Therefore, a lot depends on whether or not you are willing to pay a slight premium for a more comfortable shopping experience. This is understandable, and that cleaner and more comfortable atmosphere (wider isles included) gives Target at least one edge ... but that's not the edge being referred to above.

In January, Kantar Retail ran another study comparing the price differences between Wal-Mart and Target. The study was based on a basket full of the same stock keeping units (SKUs). The total basket prices were as follows:

Wal-Mart: $248.96
Target: $258.47

That's a 3.8% pricing "advantage" for Wal-Mart. The word "advantage" is in quotations because lower pricing isn't an advantage for all retailers. That's only so in this case because of the business models -- attempting to attract value-conscious consumers. Wal-Mart and Target rely on volume. 

Wal-Mart's lower prices led to a 17 basis point reduction in gross margin for the first quarter year over year, but Target's gross margin was also affected in the first quarter, from 29.5% versus 30.7% in the year-ago quarter. This was primarily due to promotions in order to drive traffic and sales.

It's unknown how long it will take for Target to attract traffic and sales without its margins being hit, but that aforementioned edge is about to be revealed.

Target's secret weapon
Remember how Wal-Mart's total basket price was 3.8% lower than Target's? While this is obviously going to help Wal-Mart attract more on-the-fence consumers, Target's secret weapon is its REDcard.

For Target customers using the REDcard, Target is actually 1.4% cheaper than Wal-Mart. This is because Target REDcard members save 5% on most purchases. Plus, Target REDcard members visit the store more often and buy more items. That being the case, a big key to Target's future is whether or not it can increase its REDcard memberships. Fortunately, the answer is likely yes.

In the first quarter, Target's REDcard penetration was 20.4%, up between 200 and 300 basis points year over year. Despite slower growth in recent REDcard penetration, this is likely a temporary slowdown due to the data breach. If you were seeing declines in memberships, then you should worry, but that's not the case.

Target is also offering free online shipping for REDcard members, which has led to significant online penetration. Going forward, Target will focus more on marketing its REDcard. If it can continue to make the REDcard highly enticing by offering features like free online shipping, then the future is bright, but it might take a while. 

The bottom line
Target might not be expanding margins right now, but the REDcard offers an opportunity to steal market share and increase its e-commerce presence. If it can steal market share in the brick-and-mortar space, then it should be able to cut costs in order to improve margins. If it can increase its online and mobile presence, then this should also help margins since overhead is lower than in the brick-and-mortar space.

As far as the pricing war goes, it's not as obvious as most people think. Wal-Mart has the edge, but not when you include Target's REDcard.

From an investment perspective, both retailers are likely to be long-term winners, but Wal-Mart is better situated presently. If you plan on investing in Target, then you need a great deal of patience. Target is still getting over its data breach (overall costs not yet known) and poor performance in Canada.

For all you consumers out there, now you know how to save the most money.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 30, 2015, at 8:09 PM, Thewidget wrote:

    We used to shop at Target and really like the store, it's merchandise and prices. But...

    Target executives decided to take my and other people's money and support Obama, whose policies I totally disagree with. So I am spreading the word about the poor decisions by Target executives and seeing Walmart much more often.

  • Report this Comment On August 02, 2015, at 4:54 PM, Tsmom01 wrote:

    I much prefer Target because the the overall shopping experience is just more pleasant. Even if it was a little more (which its not since I use the Redcard) I just get to stressed out shopping at Walmart.

    The cashiers never count your change back, there are never enough lines open, and the bathrooms aren't clean enough. Everything always looks so messy too.

    Add to that, I love the cafe area at Target, I can always find someone to help me locate something, and I'm not banging carts with other people because the aisles are not only spacious but not cluttered with standing displays.

    Besides, Walmart donates to candidates backed by the NRA which I don't support.

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Dan Moskowitz

Dan Moskowitz spends the majority of his time researching stocks. He believes that fundamentals, and logic pertaining to industry trends, win out over the long haul.

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