Retail Week In Review: Wal-Mart and Target

The past week was stable for retail behemoths – Wal-Mart (NYSE:WMT) and Target (NYSE:TGT), as stock for both companies did not move much. Wal-Mart faced some issues with its fired employees after it closed some stores, citing plumbing issues as the reason. In other news, Tesla Motors (NASDAQ:TSLA) showed interest in powering Wal-Mart stores. For Target, apart from the incredible success of its Lily Pulitzer collection and the subsequent criticism, nothing else made it to the news. Here’s a review of things that mattered for these companies.

Wal-Mart

The world’s largest retailer was in some negative news last week after it fired 2,200 employees following the closure of five of its stores. Wal-Mart said that these stores were closed due to some plumbing issues and it had payed the fired employees two-month advance salary, abiding by the federal law for layoff notices. However, fired employees have formed a union and asked National Labor Relations Board (NLRB) to force Wal-Mart to re-employ terminated workers. Interestingly, Organization United for Respect (OUR) has claimed that Wal-Mart has fired these employees as a punishment for taking part in protests and campaigns for pay hike. Wal-Mart has said that these accusations are baseless and the stores were indeed closed due to clogs and water leaks that were causing drainage issues.

Amid this, Wal-Mart also announced that it is planning to reduce its management in as many as 4,500 U.S. stores. For instance, it is eliminating the role of a zone manager, when currently a store has almost six zone managers. However, the company won’t fire these employees, as they will be redeployed in other stores in other roles. ^[1]

In other news, Tesla showed ambitions of providing power solutions to Wal-Mart, taking another step in its quest to become a leader in energy storage solutions. Tesla has reportedly deployed over 100 projects on this front and it is now targeting big companies like Wal-Mart and Cargill. In California, Wal-Mart already has 11 stores that are powered by Tesla batteries. It will be interesting to see how a big scale roll-out (if any) turns out. ^[2]

Our Price estimate for Wal-Mart at $82.22, stands slightly ahead of the market price. We expect the company to generate $498 billion in revenues in 2015 with earnings per share of $4.92, which lies within the consensus range of $5.27-$4.73, compiled by Thomson Reuters.

Target

The past week was relatively quite for Target, but the week before that was certainly not. The company had launched the much awaited limited collection of beachwear in partnership with designer Lily Pulitzer, which was sold out within hours of its launch. The collection was offered at a significantly lower price than its original market price and Target explicitly mentioned that products will not be replenished when sold-out. This created significant excitement and a sense of urgency among customers, who waited for hours in store ques and swamped the retailer’s website. While the collection was sold out in a frenzy, Target now faces significant criticism from customers that it did not handle the launch well. In fact, several buyers tried to make profits as they immediately put the limited edition products on eBay (NASDAQ:EBAY) at escalated prices. ^[3]

Target made a name for itself in the U.S. retail market by selling affordable and fashionable merchandise, with exclusive partnerships with designers. Over the past couple of years, it had deviated from this strategy, in a quest to improve its grocery business and launch international operations. After terrible failures on these fronts, the company finally resorted back to its long-standing iconic strategy. Success of its Lily Pulitzer partnership confirms that the company is better off being an affordable fashion destination than a grocery retailer.

Our price estimate for Target at $78.17, is about 5% below the current market price. We expect the company to generate $74.85 billion in revenues in 2015 at earnings per share of $4.12, which is just below the consensus range of $5.05-$4.20, compiled by Thomson Reuters.

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1. NLRB Asked To Support Wal-Mart Stores, Inc. Terminated Workers, Bidness, Apr 21 2015 [↩]
2. Tesla Wants To Power Wal-Mart, Bloomberg, Apr 22 2015 [↩]
3. What Went Wrong With Target Corporation Lily Pulitzer Launch, Bidness, Apr 21 2015 [↩]