4.8 Wal-Mart and Target: Strategic Differences

In the case of Amazon, we saw how getting strategy into balance had a major impact upon stock price performance.  We now examine the impact of different strategies on ratios and stock prices by comparing Wal-Mart and Target.  Our objective is to apply Financial Statement Analysis to identify the relative strengths and weaknesses of these companies (which are immediate competitors). 

The tools we will use in this case study were introduced in Chapter 3.  An overview of how we will analyze the companies is shown in Figure 1:

Figure 1:  Summary of Business Ratio Analysis

We will start with the stock price performance of Wal-Mart and Target.  Then, we will become acquainted with the business model and business strategy.  After that, we will compare them along three dimensions: profitability, operating efficiency and financial leverage.  From this, we will identify the comparative strengths and weaknesses of Target compared to Wal-Mart.

Stock Price Performance

Consider the recent history of stock price performance of Wal-Mart and Target shown in Figure 2:

Figure 2: TGT and WMT Stock Price

This reflects a relative performance that is quite different even though the two companies are immediate competitors.  First, you can see that WMT was less volatile than TGT.  In 2001 and 2002, there was a recession, and both stock prices fell.  You can see that TGT recovered strongly, until the deep recession of 2008, which affected TGT much more than WMT.  Again, TGT has recovered from the decline of 2008.  Even though WMT declined in 2008, it was a much smaller decline than TGT.

Why is the price behavior of these two firms so different? 

To answer this question, let us first become acquainted with their respective business models and strategies.

Business Model and Strategy

We start with Item 1 from Target’s and Wal-Mart’s 2010 10-K.  You have already seen that this section of the 10-K contains a lot of useful information about what the firms do and how they do it.  So let’s see if their business models and strategies are different.

These two firms have a similar business model designed primarily around a traditional physical value chain.

You can see that they have chosen to perform similar activities (retail) in different ways.  The initial paragraphs in Item 1 of their respective 10-K’s make clear they have different business strategies with respect to their marketing and sales activity.   Wal-Mart is committed to “saving people money” which can only be implemented via a low price strategy for all the merchandise in their stores.  Target on the other hand is committed to delivering a “shopping experience that is preferred by our customers,” who are referred to as “guests.”   Target therefore is committed to higher marketing expenditure within their stores and a higher level of customer service.   Target continues to add that their products are “both everyday essentials and fashionable differentiated merchandise at discount prices.”   Thus although low prices are important to their strategy, they are not as important a component of their business strategy compared to Wal-Mart. 

Item 1 reveals a lot of interesting information about their business strategies.  Financial statement analysis will reveal the extent to which the strategies are working.  In fact, one of the objectives of financial statement analysis is to assess how the managers of a company are performing given the stated objectives of the corporation.  We will see below how the differences in strategy are reflected in profitability, operating efficiency, and financial leverage