By and  on December 8, 2006

NATICK, Mass. — The Wal-Mart greeter wore a Christmas jingle-bell trimmed hat and stood in front of a sign that read, "Smile, You're Saving Even More."

Inside, however, shopper Laura Mileskwi, 42, felt less than merry about shopping at Wal-Mart. "The inventory sits around too much," she said, surveying the apparel department. "Some of it gathers dust."

A mile away, in a Framingham, Mass., Target, Paulette Landmesser, 23, was already in the process of breaking her resolution to spend less this year.

"It all looks pretty good," she said. "Not enough coats, but the gloves and purses are really cute."

In the battle between discount and design, score one for design.

Target bested its Bentonville, Ark., rival in November, posting a 5.9 comp-store increase. Wal-Mart, in contrast, saw sales down 0.5 percent, its first U.S. decline in a decade. Wal-Mart has projected a 1.5 percent comp-store sales increase for December.

Richard Hastings, retail analyst at Bernard Sands, calculated Wal-Mart's negative comp amounts to $87 million in lost sales in November. He speculated Target was one of the major beneficiaries.

"Wal-Mart declared early they were going to be very promotional, but once again they didn't live up to their word," said Marshall Cohen, chief industry analyst at Port Washington, N.Y.-based The NPD Group. He said the retailer has been outfoxed by Target, which had a broader assortment of Web deals, door-buster specials and limited-time gifts. "Wal-Mart will promote their way to sales growth of 2 percent, but it's going to be messy."

In terms of apparel, it seems Wal-Mart's fashion is still finding its footing, while Target's popular styles are often out of stock.

Robert Buchanan, a retail analyst at A.G. Edwards & Sons, said Wal-Mart's inability to adapt to fashion trends in a meaningful way for its core shopper has hurt results this holiday season. While average prices are lower at Wal-Mart, he believes customers are looking for value at J.C. Penney and Kohl's, as well as at Target.

Wal-Mart's difficulties in the fashion arena are affecting other areas of the store. "Wal-Mart is all about the one-stop shop, the ability to complete several items on the shopping list in one trip," Buchanan said. "When Wal-Mart misses on fashion, it calls into question the whole one-stop appeal and gives consumers one less reason to enter the store in the first place."Target, on the other hand, "continues to do a masterful job of trend interpretation and item merchandising," Buchanan said. "Its weakness is in-stocks. Target continues to struggle with out-of-stocks on too many key items. It has been and remains committed to constant newness on the floor, but too many key parts of their business experience out-of-stocks."

The irony of Wal-Mart's operational strengths and Target's fashion flair were not lost on Buchanan. "To me, the game has changed," he said. "For all those years that Wal-Mart was [doing well], it was about great systems, great technology and great in-stocks. Now, with the core discount shopper more savvy in the fashion sense, you've got to be adept at trend identification."

Can Wal-Mart still turn its sagging holiday fortunes around?

Joseph Beaulieu, a retail stock analyst at Morningstar, said Wal-Mart has in the past regrouped and improved its performance following a weak start. "Two years ago, Wal-Mart had a very disappointing weekend around Thanksgiving and rebounded in December," he said. "They poured it on with promotions and increased advertising. Wal-Mart is very operationally sophisticated. I wouldn't write them off for this year."

But Wal-Mart's holiday strategy — to herald discounts far and wide — has thus far failed to get registers ringing as merrily as the retailer hoped. In November, traffic was down, and the apparel and home businesses again disappointed. Wal-Mart began scrambling this fall to adjust its apparel as customers rejected of-the-moment styles such as skinny jeans, but engineering rapid change is difficult on roughly 3,800 U.S. stores. Wal-Mart president and ceo Eduardo Castro Wright said apparel will continue to be challenging this quarter but predicted improvement by spring.

Morningstar's Beaulieu noted that Metro 7, the line blamed for some of Wal-Mart's fashion woes, represents a small percentage of apparel sales. Wal-Mart made a Metro 7 promotion part of its pre-Thanksgiving price cuts, in an attempt to flush excess inventory out of stores.

In a research note, Hastings said Wal-Mart's experiments with more upscale merchandise, such as Metro 7, are "attempts to respond to the unpleasant truth that their core customer base — the less-than-wealthy — are point-blank running out of gas. If this is the case, then experiments with fashion and store remodels would only worsen the situation and invite competition with moderate department stores like Kohl's and J.C. Penney."The timing of Thanksgiving this year may be difficult for Wal-Mart's low-income customer, Beaulieu noted. "Wal-Mart's stereotypical customer that's living paycheck to paycheck is not a majority of the customer base, but it may be a meaningful segment," he said. "If you're living paycheck to paycheck and Thanksgiving falls early, why would you tie up your money early? There wasn't any motivation to go shopping on Black Friday."

Wal-Mart's Natick store demonstrated the yin and yang of the retailer's desire to please its budget-crunched loyalists while reaching for a more affluent user. Rollbacks and "Smile, You're Saving Even More" signs predominated, but the retailer also had George cableknit cashmere sweaters for $35 and a home entertaining collection, Csquared by Colin Cowie, the celebrity decorator ($29.92 for a marble cheese board.)

Several Wal-Mart shoppers in stores in Natick and Danvers, Mass., complained there was not enough staff to help them. "The apparel department is more organized, but it's hard to find someone to talk to," said Paula Lattoff of Rockport, Mass.

Target, meanwhile, continues to build on two years of strong results by emphasizing exclusive apparel and decor partnerships, such as Rafe for Target and Behnaz Sarafpour for Go International, while matching Wal-Mart as closely as possible on commodities and specials.

The NPD Group's Cohen praised Target for cohesive visuals that explain to customers how to layer leggings, miniskirts, cami tops, tunics and T-shirts — a major look for juniors. By contrast, he said, merchandise drapes limply and lacks context on the thin hangers Wal-Mart uses in its junior department. "Without the right visuals, who knows why they are selling spaghetti strap jersey dresses right now," he said.

Target, as usual, has effectively been using publicity to add a festive gloss to its merchandise. Magician David Blaine's cage stunt kicked off Black Friday selling, while an animated light installation by Dutch designer Tord Boontje opened Monday in Manhattan's Union Square Park footpath. Boontje's lacy snowflakes and trees decorate storefronts and merchandise displays.

Target also unveiled limited-time gifts such as a Nikon camera case designed by Alice Temperley for $227.87, a Dolce & Gabbana fragrance set for $39.99 and a diamond-studded Hello Kitty necklace for $199.99. The retailer doesn't have limited-edition apparel gifts for women like it had last year but has included several cashmere sweaters, priced at $49.99, in the current Isaac Mizrahi collection. They were nearly gone in Natick on a recent visit.For the weeks ahead, Wal-Mart needs to promote value and one-stop convenience, while Target needs to stay in stock and be reasonably competitive on price, said retail experts.

A Wal-Mart spokeswoman said the retailer will release three additional circulars late in the season touting low prices for last-minute gifts, ideas for gift cards and New Year's resolutions.

"Shoppers can also look forward to additional price cuts on a large selection of key gift, entertaining and holiday items," she said.

Both retailers have been innovative in using Web sites to keep customers checking for new deals. Wal-Mart's Web traffic rose 60 percent in the days surrounding Thanksgiving, the retailer said. Target is featuring weekly sales on gift items. This week, the company had a Mossimo leather jacket at $69.99 with free shipping.

Both retailers can claim expanded pantry sections carrying dairy products and frozen foods along with dry goods as competitive assets for drawing time-pressed shoppers during the final rush. Both Wal-Mart and Target have been aggressive in updating older discount stores to include the feature.

Jeffrey Klinefelter, an analyst at U.S. Bancorp Piper Jaffray, said the different fortunes of Target and Wal-Mart this season reflect, in part, strategic decisions made over the past decade.

"Target over the last 10 or 15 years has spent disproportionately on marketing to create a brand halo that a higher-end consumer has finally accepted," he said.

In contrast, he added, "Wal-Mart spent on price reductions. When it comes to selling apparel and other elements, it's not just about value. It's about selling a reflection of the consumer's personality."

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