The Expectations Game

• Email
• Share
• Print

Enormous retailer No. 1 reports a same-store sales increase of 2.7%. On the same date, large retailer No. 2 (though not nearly as large in comparison) reports a same-store sales increase of 2.8%. Retailer No. 1 rallies on its results, while retailer No. 2 declines.

For those who hadn't guessed, retailer No. 1 is Inside Value selection Wal-Mart (NYSE: WMT), and retailer No. 2 is competitor Target (NYSE: TGT). On the surface, the reactions to the results seem a bit bizarre, but the expectations for the two companies are somewhat different.

Consider, for example, that for the four-week August period, Wal-Mart reported sales of $16.9 billion at its Wal-Mart stores, and $26 billion when you include sales from its international stores and its Sam's Club warehouses, which compete with BJ's Wholesale Clubs (NYSE: BJ). Target, on the other hand, reported total sales of $4.2 billion for the entire company during the same period. Higher growth is often expected from smaller companies, and Target is no exception. Additionally, Target has the hipper, more friendly image going for it.

I don't put much stock (pun intended) in analyst estimates, but they are useful for getting a handle on how much growth investors expect from a company. The better way to do this is to perform a discounted cash flow analysis for each company to see what level of growth justifies today's stock price. But for the sake of simplicity (and time) we can look at Yahoo! Finance, where we see that analysts expect 13.4% out of Wal-Mart and 15% from Target for the next five years. Along the same lines, same-store sales of 2% to 3% are the norm for Wal-Mart, but at Target, the expectations call for more than 4% same-store sales growth.

My wife and I shop at multiple Targets and Wal-Marts in our area. The prices are generally similar, and to me there's not much difference between the two. My wife, however, generally sides with Target, which she perceives as being neater and easier to get around.

Lately, that's changing a bit; when we compare the newer Wal-Mart stores with the newer Target stores, the two are more alike than not. On a few occasions lately, we've found some of the items we buy priced considerably cheaper at Wal-Mart.

This has me wondering whether Wal-Mart is finally starting to eat into the perception that Target offers similar prices but a better overall shopping experience. My own anecdotal evidence is beginning to point to yes, but I'll need to do more legwork to see whether Wal-Mart is indeed gathering steam and putting some pressure on Target, or if the lower same-store sales for Target are simply due to slower consumer spending overall. Depending on which is the case, expectations for Wal-Mart may not change much, but expectations for Target may need to come down a bit.

Wal-Mart is a Motley Fool Inside Value selection. Looking for undervalued top-shelf stocks? Finding and recommending them is Inside Value's specialty. Try it out f ree for 30 days .

At the time of publication, Nathan Parmelee had no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.