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Retail Seesaw: Target Shares Tumble as Wal-Mart Rides High

Wal-Mart's fashion star is rising just as Target's appears to be waning.

Target has seen a decline in its stock price, as Wal-Mart is experiencing a resurgence.

Wal-Mart’s fashion star is rising just as Target’s appears to be waning.

Two days after Wal-Mart Stores Inc. said early spring sales of its private label apparel, where key items cost $10, were “very promising as a leading indicator,” Target Corp.’s stock fell Thursday in the wake of a Citigroup downgrade that found fault with the firm’s women’s apparel offerings. Wal-Mart’s shares, in contrast, rose.

And Wal-Mart has a number of changes in the pipeline that should keep up the pressure on its smaller, though still huge, discount rival.

Over the next several months the Bentonville, Ark.-based retailer will introduce Ocean Pacific and L.E.I. fashions to its stores, and it is also gearing up investment in “growth businesses,” including athletic apparel and shoes and licensed goods. And sources said there are more deals in the works at Wal-Mart to bring major brands in as proprietary labels, along the lines of the Op and L.E.I. agreements.

But that might just be the beginning.

Deborah Weinswig, the analyst at Citigroup Global Markets Inc. who downgraded Target with a “Sell” rating on Thursday, also said in a research note that Wal-Mart could rejigger its apparel supply chain.

“We expect that company to eventually use third party operations for all globally sourced apparel and home [goods] — similar to Kohl’s, which utilizes Li & Fung for the majority of their globally sourced merchandise,” she wrote. “This should lead to improved product offerings” at Wal-Mart.

It is not known how close Wal-Mart is to making such a move, or with whom or how that would impact its New York design office. A Wal-Mart spokeswoman declined to comment on the speculation, but did note that the company has “a robust global procurement team that’s a key part of our sourcing for categories across the store.”

All that would be in the future, though, and Target seems to have problems now.

At the bell Thursday, Target’s stock declined 3.8 percent to $51.36, while Wal-Mart Stores rose 0.2 percent to close at $49.79.

The decline in Target’s share price was steeper than the broader retail sector, which bled as continued recession fears from weak economic data spooked investors. The S&P Retail Index declined 1.9 percent to 389.73. The Dow Jones Industrial Average dropped 1.2 percent to 12,284.30, and the broader S&P 500 slid 1.3 percent to 1,342.53. The WWD Composite Stock Index, which includes retailers, beauty firms and vendors, was flat at 867.


Regarding Target’s downgrade, Citigroup pointed to a lack of focus in the firm’s women’s fashions, risk in its credit card portfolio and the perception that Wal-Mart is the discount price leader. Weinswig set a target price of $48 on the stock.

Target, one of the few retailers to maintain ownership of its credit card business, also has to contend with the deteriorating conditions for lenders.

Summarizing the firm’s credit performance in January, Weinswig said delinquencies were up in January to 4.03 percent, compared with 3.89 percent in December and 3.83 percent in November.

Charge-offs, or accounts that are at least 180 days delinquent, fell to 6.54 percent last month from 6.84 percent in December and 7.05 in November, but were up from a year earlier.

Target’s reliance on its credit card business to drive profits has long concerned some analysts, who worried over the potential for skyrocketing delinquencies in the unit if the economy softened.

Last summer, Target faced pressure from activist investor William Ackman, who pressed the Minneapolis-based chain to improve profits. Since then, the company retained Goldman, Sachs & Co. to mull alternatives for its credit card business.

Just as worrisome, there is a growing sense Target’s apparel business is in need of a makeover. In women’s wear, Weinswig said Target is suffering from a bad case of sameness. Women’s apparel accounts for an estimated 11 percent of total sales. Weinswig said key brands such as Mossimo, Merona and Cherokee are duplicating each other’s offerings and that management has put more emphasis on brand panache than quality.

“There’s very little differentiation, each brand used to have a distinct image,” said Weinswig in a telephone interview of Target’s women’s offering. “There has been too much focus on Go International because that’s the sexy part and not the bread and butter.”

Through the Go International program, Target has temporarily sold offerings from Proenza Schouler, Erin Fetherston and Behnaz Sarafpour, though the initiative is not seen as a big revenue generator. The firm’s successful collaboration with Isaac Mizrahi also is wrapping up this year, as the designer heads to Liz Claiborne. Analysts estimate Target will have to replace anywhere from $300 million to $500 million in lost revenue as a result.


“I don’t know how you replace Mizrahi,” said Weinswig. “He was kind of a diamond in the rough. He’s done so much in terms of helping the fashion quotient and just kind of giving their apparel department a point of view.”

Target’s overall point of view, or positioning, might be part of its problem. Often seen as having pitch-perfect marketing, highlighting its bull’s-eye and designer offerings, Target’s chic image might be out of step with a customer becoming increasingly price obsessed.

Although Wal-Mart and Target historically have only a 1 to 3 percent differential on prices for like items, 87 percent of the shoppers surveyed by Citigroup said Wal-Mart had better pricing.

“If the consumer is becoming more focused on price, I don’t think that most customers think of Target as a low price alternative,” said Weinswig.

Target is set to report its fourth-quarter and full-year results before the opening bell Tuesday. Earlier this month, the discounter said comparable-store sales inched up 0.2 percent for the fourth quarter and a more robust 3 percent for the year.

Wal-Mart’s comps, excluding fuel sales, rose 1.7 percent in the fourth quarter and a milder 1.4 percent for the full year.