Walmart hits new highs and Target dives after earnings as rivals diverge even more

Target's stock tumbled to a 52-week low on Wednesday, a day after Walmart shares soared to an all-time high — as the rival retailers' earnings reports again underscored how their performance has diverged.

Target posted its biggest earnings miss in two years and cut its forecast. The company spoke about a "deceleration in discretionary demand" and blamed higher costs from rushing to move inventory ahead of the short-lived port strike in October.

On the company's earnings call, CEO Brian Cornell described U.S. consumers who are "shopping carefully as they work to overcome the cumulative impact of multiple years of price inflation" and holding out for the best possible deal.

Walmart, on the other hand, hiked its full-year forecast. It said it's gaining upper-income shoppers and seeing better trends for sales of merchandise outside of the grocery department, even as consumers look for value.

Customer traffic gains were similar at the two stores, yet Walmart's sales trends looked much better than Target's. Walmart's traffic growth edged out its rival's, with a gain of 3.1% at Walmart U.S. versus 2.4% at Target. Walmart's same-store sales rose 5.3%, while Target's increased only 0.3% year over year. Walmart's e-commerce sales in the U.S. rose 22%, a bigger increase than the nearly 11% at Target.

The sharp differences between the two big-box retailers — and how their businesses are executing in the same economic backdrop — illustrate where consumers are willing to spend money and where they are pulling back as customers remain selective about spending. That sharp divergence of the winners and losers in the industry could become even starker as retailers enter their most crucial sales season of the year.

Michael Baker, a retail analyst at D.A. Davidson, said Target's disappointing results reflect the company's performance rather than the health of consumers.

"It's as simple as this: They are losing share," Baker said. "They are losing share to Walmart, Amazon and Costco."

He said Target's inconsistent results over the past year is a warning sign about execution. The company has missed Wall Street's quarterly sales and earnings expectations in two quarters and beat on them in two other quarters.

"That kind of back and forth makes you wonder if there's something going on internally," he said.

Several equity research analysts, including Citi Research, Deutsche Bank and HSBC Global Research, downgraded Target's stock on Wednesday, citing concerns that the Minneapolis-based retailer has lost shoppers and sales to the competitors. Its stock dropped more than 20% in trading Wednesday.

In a research note, Paul Lejuez, a retail analyst for Citi, said the company's poor results and weak outlook show Target is "likely losing share" to Walmart and risks losing more of the market unless it steps up promotions.

One of the roots of Target's troubles is the company's merchandise mix, said Kate McShane, a retail analyst for Goldman Sachs. About 60% of Target's sales come from discretionary items, such as home goods and clothing. That's the opposite of Walmart, which draws about 60% of its sales from everyday necessities, such as groceries and household items like paper towels.

Those discretionary categories, which customers sometimes splurge or pull back on, "is explaining some of the volatility and the bumpiness you are seeing that is more specific to Target," she said.

Both Walmart and Target mentioned the negative impact of the port strike, but Target appeared to put a major share of the blame for its weak quarter on the stoppage.

D.A. Davidson's Baker said weak sales can "make those kinds of cost increases stand out more."

Target has other questions that will factor into its future, including who will lead the company. Cornell, who has been chief executive since 2014, agreed in September 2022 to stay on as the company's leader for three more years.

On a call with investors on Wednesday, Cornell pointed to "green shoots" in the business, even as sales results disappointed. He spoke about customer traffic growth, online sales gains and relative strength in apparel sales, even as unseasonably warm weather kept shoppers from buying clothes for cooler temperatures.

Yet on that same call, several analysts posed questions about Target's plans for the future. UBS equity research analyst Michael Lasser asked if Target needs to make changes or invest more in its business.

Cornell said the company will stick with what it already does: offering unique items and national brands, opening new stores, expanding its advertising business and offering more ways for shoppers to buy online.

"We'll continue on our current strategy, stay in step with the consumer and make sure Target's doing the things that consumers across America expect from us," he said.