While Wal-Mart plods along, Target stumbles

By Nicole Maestri - Analysis

NEW YORK (Reuters) - What a difference a year makes.

Last holiday shopping season, Wal-Mart (WMT.N) was struggling to get sales on track as lower-income shoppers snubbed its efforts to imitate smaller rival Target (TGT.N) by stocking its stores with trendy but cheap products.

This year, it is Target that is struggling as middle-income consumers cut back on discretionary spending.

Traffic at Target stores is declining and many shoppers are ignoring higher-margin goods, such as cashmere sweaters and home decor, in favor of basics such as food. Last week, Target warned it may not meet its fourth-quarter earnings forecast.

"They're getting squeezed on both ends," said Patty Edwards, an analyst at investment management firm Wentworth, Hauser and Violich, which owns Target Corp and Wal-Mart Stores Inc shares.

The middle-income households that Target caters to are facing rising mortgage payments and falling home values, while lower-income shoppers are heading to Wal-Mart for cheap food and clothes.

Department stores such as Kohl's Corp (KSS.N) and J.C. Penney Co Inc (JCP.N), which also offer low-cost designer merchandise, are heavily discounting for the holidays.

Heading into 2008, Target will face tough comparisons to strong sales in early 2007, while Wal-Mart will be cycling some lower sales comparisons.

"It's going to be way harder for Target than Wal-Mart," Edwards said.

TOILET PAPER AND DRESSES

Last fiscal year, Wal-Mart's U.S. sales at stores open at least a year, or same-store sales, rose at the slowest pace on record as it alienated its core lower-income shoppers by trying to sell higher-margin skinny jeans and high-thread count sheets.

This year it has shifted gears, clearing out poor-selling goods and returning to touting low prices.

Wal-Mart has said it is focused on improving U.S. sales and lowered Wall Street's expectations so much investors were happy when it reported 1.5 percent growth for November.

While Wal-Mart was stumbling, Target was Wall Street's darling. It was able to get shoppers to buy not only toilet paper and food, but also Isaac Mizrahi dresses and home decor that mimicked items found at more upscale retailers.

Since the end of 2002, Target's shares are up 77 percent, while Wal-Mart stock is down 2 percent.