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: Quote, Profile, Research, Stock Buzz) was struggling to get sales on track as lower-income shoppers snubbed its efforts to imitate smaller rival Target (TGT.N: Quote, Profile, Research, Stock Buzz) 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: Quote, Profile, Research, Stock Buzz) and J.C. Penney Co Inc (JCP.N: Quote, Profile, Research, Stock Buzz), 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.