Walmart vs. Target: Why Discounts Drastically Affected Profits in Opposite Directions
Inflation-weary consumers tired of paying high prices have been scouting deep discounts this year, prompting retailers like Walmart and Target to slash prices on items to help move excess inventory off the shelves. But while the operating environment is similar for both retailers, the financial impact has been much different.
Explore: Your Biggest Money Etiquette Questions Answered
See Our List: 100 Most Influential Money Experts
On Tuesday, Walmart posted a 23% year-over-year gain in earnings per share for its fiscal second quarter, topping analyst expectations. It also logged a 6.5% increase in same-store sales at its U.S. stores, which also beat views. The retail giant did warn that its full-year EPS would decline 9% to 11%, Reuters reported, though that is a slight improvement from its previous guidance of an 11% to 14% dip.
In contrast, Target took a major beating during the second quarter, reporting a 90% decline in second-quarter profit on Tuesday that fell well short of analyst estimates, CNN Business reported. It was the second straight quarter of plunging profits for Target, with the Q2 decline much steeper than the 40% drop in Q1 earnings.
At first glance, the wide gap in financial results for Walmart and Target seems odd considering that both companies have been forced to slash prices on much of their merchandise to draw foot traffic and reduce inventory.
As Reuters noted, Walmart said it cut prices on clothing and other goods to help clear inventory valued at more than $61 billion at the end of the first quarter. The retailer reported inventories of $59.92 billion at the end of the second quarter, which was 25% higher than a year earlier.
In a statement, Walmart Chief Financial Officer John David Rainey said that electronics, home items and clothing were “problem areas” that required a major reduction in stock.
Similarly, Target slashed prices on general merchandise such as clothing, electronics and home goods. But those price cuts seemed to do little good. Target ended the second quarter with 1.5% more inventory than it had three months earlier and 36% more than it had the previous year.
Take Our Poll: What’s the Table Time Limit on a $400 Restaurant Meal?
The main problem for Target is that it has a much heavier dependence on discretionary items than Walmart, experts say. Walmart gets a bigger share of its sales and profits from groceries and other essentials that consumers must buy even in periods of high inflation. Target typically relies more on sales of items such as clothing, jewelry and electronics that consumers can bypass when prices are historically high.
That reliance on discretionary items likely means Target’s results will continue to lag Walmart’s in the coming months. Looking ahead, Target reiterated its guidance for full-year revenue growth in the low- to mid-single digit range and an operating margin rate in a range of about 6%.
More From GOBankingRates
- Experts: Here's How Much You Should Have in Your Checking Account
- Explore GOBankingRates' 2023 Banking Resource Center
- The 10 Best Credit Cards for 2023
- 6 Strategies for Paying Off Multiple Credit Cards
