How Target Could Top Wal-Mart and Costco

Target (TGT -0.57%) will release its quarterly report on Thursday, and investors are concerned about the slowdown in growth that they're expecting to see. With the shares having gotten hit hard in recent months, Target needs to come up with ways to outpace Wal-Mart (WMT 0.38%) and Costco Wholesale (COST -0.59%) and emphasize the distinctive ways in which it tries to stand out from the big-box retail crowd.

Target has done a good job of trying to be all things to all shoppers. On one hand, it seeks to compete on price with Wal-Mart and Costco, keeping customers coming in to take advantage of good deals on basic everyday items. Yet to a greater extent than Wal-Mart and Costco, Target has also been about more than just low prices, with the retailer bringing in well-known fashion designers to create special merchandise lines to bring fashion-conscious shoppers into the doors. With that two-part strategy, Target hopes to keep Amazon.com (AMZN -2.88%) and other online competition at bay while giving Wal-Mart and Costco shoppers reasons to switch. Let's take an early look at what's been happening with Target over the past quarter and what we're likely to see in its report.

Stats on Target

Source: Yahoo! Finance.

When will Target earnings rebound?
Analysts have slashed their views on Target earnings in recent months, cutting October-quarter estimates by $0.25 per share and dropping fiscal 2014 and 2015 projections by about 10% each. The stock has suffered only modestly, falling 2% since mid-August.

Target started out the quarter with some disappointing results from its July quarter. Although the company topped earnings estimates by a penny, it reported only mediocre same-store sales growth of 1.2%, and Target said it would likely hit the low end of its previous full-year earnings guidance. CEO Gregg Steinhafel cited "ongoing household budget pressures" as driving the poor results. The only saving grace is that Wal-Mart had similarly bad results, but that didn't stop Target shares from falling on the news, especially given the success Costco has had in avoiding the hits its rivals have taken.

Part of the issue facing Target is an aggressive strategy involving a large expansion into the Canadian market. During the July quarter, Target opened 44 stores in Canada, and it expects to open 56 more by the end of the year. But the expansion is also raising Target's expenses, which is responsible in large part for the falling earnings guidance. If Canada treats Target well, then the short-term pain could bring it a huge competitive advantage against Wal-Mart and Costco by broadening its horizons beyond the domestic retail market.

In order to compete during the key holiday season, Target has joined Wal-Mart in pushing Black Friday back to Thanksgiving Day, opening its doors at 8 p.m. in order to boost sales. Costco hasn't felt the need to resort to that strategy, and Target might eventually face backlash that would make the trivial increase in sales from being open a few extra hours not nearly worth the negative publicity. Moreover, with Wal-Mart having just falling same-store sales for the third straight quarter, the holiday season might not turn out all that well for any retailer this year.

Still, Target has one thing going for it: its employee base. Target has avoided the labor strife that Wal-Mart faces even though Target pays lower average wages than either Wal-Mart or Costco. With positive ratings for work-life balance and company culture, Target has struck the right balance between keeping costs down and keeping workers happy.

In the Target earnings report, watch to see if same-store sales start to move upward again and look for clues about how the Canadian expansion is progressing. If Target can keep making progress, investors should forgive short-term shortfalls and hope for better times ahead.

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