Rosenblum says comparing the two retailers is "something of a false equivalency." "They are very, very different businesses," Rosenblum said, pointing out how Walmart has a more substantial food and beverage business than Target. "In an environment where consumers are stretched and just trying to cover the essentials, a retailer like...Walmart who is the biggest grocer in the world is going to benefit tremendously," Rosenblum said.
Martis noted that more high-end consumers are shopping at Walmart and at TJX Companies (TJX) saying, "the high-end consumer, who we've learned from the luxury retailers, is being more conservative." "They still want the best brands, but they want to pay significantly less for them," Martis said, adding "the American consumer, what's really enticing them, is those steep promotions."
When it comes to stocks to buy, Rosenblum has an "outperform" rating on Target and a "market perform" rating on Walmart. When asked to explain why, Rosenblum said "Target is priced for desperation and Walmart is priced for perfection."
And Target, though, different story. The retailer saw its first quarterly sales decline in six years. It was hit by slowing traffic and rising shrink a.k.a. theft. That's on top of shopper backlash from a June Pride campaign.
Target also cautiously lowered its full-year EPS expectations, but Walmart upped guidance on confidence in consumer momentum. As part of Yahoo Finance's week-long special Retail Evolution, The New Era, we're diving into what these earnings tell us about the consumer.
With us now to discuss, Jharonne Martis is director of Consumer Research at LSEG, and Dean Rosenblum, Bernstein senior research analyst for US retail. Thank you both for being here. Dean, I want to start with you here, and what we just heard from Walmart in contrast from what we heard from Target. I mean, is it just as simple as consumers wanting to spend less? Is that why Walmart seems to have the edge here?
DEAN ROSENBLUM: Well, I don't think so. I think if I'm being very transparent, I think comparing Walmart to Target directly is something of a false equivalency. They're very, very different businesses. Food and beverage only comprises about low 20, 21-ish% of sales for Target.
It's over 60% for Walmart US. Similar Sam's. And in an environment where consumers are stretched and just trying to cover the essentials, a retailer like Target who-- sorry-- Walmart, who is the biggest grocer in the world, is going to benefit tremendously from that disproportionate focus on stable spending.
Target, on the other hand, is going to see softness in the discretionary categories which is what we're seeing, and I think it's not a perfect comparison Walmart to Target in terms of equivalency.
BRAD SMITH: Jharonne, your perspective on that-- is it not necessarily as easy as going apples to apples on Walmart and Target?
JHARONNE MARTIS: I'm in agreement. And also especially because Walmart told us today, you know, that groceries is their biggest seller. That's why they did very strong. Also their private label is doing really well. But what is key and trend that we've been seeing a lot with Walmart is that membership number.
Not only have they been gaining new customers, but they've been able to keep the existing customers. And that in return is turning into loyalty consumers that are now extending themselves. What I mean is today we saw that general merchandise grew a little bit stronger than expected.
The very first time that we've seen that consumers might be feeling better about going back to those discretionary items. But when they do that, the loyalty that they now have for Walmart is allowing them to do that at Walmart as opposed to Target, which is known for the place to go for discretionary items.
So this is where we're seeing that Walmart has the upper hand compared to Target. They've gained those loyal customers because of groceries, and now that's converting into them extending themselves and buying general merchandise. Today Walmart said that big ticket items actually saw a little bit of a splurge.
JULIE HYMAN: That's interesting here that if you're in the store already and you're buying your groceries, then you're going to look in other parts of the store. That's something that these mass market retailers have always pushed for. But I wonder if indeed it is grocery that is bringing them in. Is it not just that Target maybe that's not going to do as well in this environment? Is it other grocers, Dean, that also maybe are going to suffer if Walmart is taking that share?
DEAN ROSENBLUM: Yeah, and actually we've seen that. You know, we cover Kroger and Albertsons and both of them actually grew-- they both grew in their recent earnings releases, but they grew slower than-- Walmart is absolutely gaining share and growing faster than the grocery market overall and the grocery pure plays as well, including the whole grocery segment. So that's definitely the case relative to grocery pure plays.
BRAD SMITH: And so as we think about some of the other merchandise categories that both of them have had to really fine tune their inventory position on. Dean, I'll put this one back to you as well because that inventory positioning, a theme that we've heard across some of the major retailers that have reported this week and this earnings season. So is the worst of the inventory preparation and forecasting behind this as at this point?
DEAN ROSENBLUM: Yeah, I think so. I mean, Target took its inventory down about 5% in dollars in the first quarter. And on units we estimated it was in the low teens. This quarter, their inventory position was down 17% in dollars versus last year this time. I will remind the viewers that second quarter of 2022 was the trough of Target inventory writedown despair.
Target has also taken a much more cautious approach to procurement of merchandise, so we think yes, absolutely there is not another shoe to drop relative to some giant inventory glut and ultimately writedowns and markdowns. We just don't see that as happening.
JULIE HYMAN: On a related note, Jharonne, I'm curious what we're seeing margin-wise. It actually looks like we saw some relatively healthy margins on the Walmart front. Its consolidated gross margin was up 50 basis points here. And it seems like even though they're holding the line on price to a degree, that they're still managing to expand margins. Is that something we're going to continue to see?
JHARONNE MARTIS: Yes, and this is across the board in retail. The reason being is because we're not seeing those high inventory levels that we saw during the pandemic. A lot of retailers have been managing those inventory levels better and as a result, they're leaner.
Because they're leaner, a lot of these retailers are not sitting on massive inventory that they have to move and discount them. And that is the key right there, the discounting level. Because they've been able to maintain healthy discount levels, that's why we're seeing better gross margins, and that's why in general we're seeing that more retailers are beating earnings estimates as opposed to missing. It all comes down to leaner inventory levels and managing those significantly better than during the pandemic.
BRAD SMITH: To what extent, Jharonne-- just to add on to that-- does this come back to wealthier shoppers coming into Walmart as they're looking for some type of trade down or just to make sure that they're also perhaps going where they could find the best deal?
JHARONNE MARTIS: Absolutely. That was not only evident in Walmart but also in the TJX numbers of the high-end consumer who we've learned from the luxury retailers is being more conservative and thinking twice before making those impulse shopping. They still want the best brands, but they want to pay significantly less for them. And that's why TJX also saw very strong numbers yesterday.
So in general we're seeing that the American consumer what's really enticing them is the promotions that was evident in the US retail numbers that came out earlier this week for the month of July. July was heavily promotional because of Amazon Prime Week that helped significant other retailers as well.
And it's the promotional levels. It's that value proposition that's what's enticing the shopper to open. And also a slight sign that we might be starting to going back to normal to the way things were before the pandemic. That's also evident by Walmart's numbers today telling us that consumers did buy big ticket items. This is the first time in a very long time that we've heard that consumers are doing that again.
JULIE HYMAN: Yeah, it's interesting. Dean, what are your impressions sort of the bigger takeaways on consumer spending here? Is it-- and I would also ask, is what's good for Walmart sort of have negative implications for the overall economic picture in the US particularly?
DEAN ROSENBLUM: So I don't know that that's necessarily the case. I think Walmart is absolutely occupying a moralistic place among consumers even at the top end of the income spectrum.
But recognize, though, that we don't actually have absolute numbers on that. We do know that it's growing based on reports from the company, their penetration of higher income households. But it's also the place that they have the highest opportunity to gain incremental customers. So it's kind of like if they're going to gain incremental traffic and incremental shoppers, that's sort of where it has to come from.
I don't necessarily see it as sort of a zero-sum game that if Walmart wins at the higher income that everybody else loses. So I mean, we'll see how it shakes out. I think Jharonne's point about Walmart gaining customers and the extent to which those customers stick will be absolutely something to keep an eye on.
One point on the large ticket discretionary, though, all of the companies that we cover that sell both staples and discretionary, particularly big ticket discretionary have reported prolonged softness in big ticket discretionary. That's true for the home improvement retailers. It's true for Costco especially.
That it's-- we're seeing signals of it starting to bounce back at Walmart, I think is a positive sign for the economy overall. And that's certainly something we're keeping an eye on. And as an aside, as it does come back to discretionary spending return should accrue beneficially to Target disproportionately given their mix, particularly in home and apparel.
JULIE HYMAN: Well, Dean, sort of to follow up on that. You know, we began the conversation by you saying, it doesn't necessarily make sense to compare the businesses directly because they are quite different businesses. From an investment perspective, though, if you're looking at them, you might be saying, I want to buy one over the other.
And you do, if I'm not mistaken, you have an outperform on Target and a market perform on Walmart. Can you talk us through that, especially given what we've heard in the last 48 hours from the two companies, why you prefer Target over Walmart?
DEAN ROSENBLUM: So the very short answer is Target is priced for desperation, and Walmart is priced for perfection. I mean, with Walmart's results today, it's I think an interesting point to note that the stock is essentially flat on the day despite the wild top down beat and the guide up for balance of year.
Whereas Target missed on top line yesterday by mid-single digits, and the stock sort of barely blinked. And I think the reason for that is the concern with investors right now is Target's ability to improve-- restore its profitability. And we saw an EPS, an operating profit beat from Target yesterday.
It's all about the upside from here and for us, Walmart's price for perfection. And we may not be at the bottom on Target now, but we are a long way from the top. We're a pretty strong advocate of Target here.
BRAD SMITH: Jharonne, if we were to see any type of shift in how consumers are spending or their confidence even to start matriculating back towards some of the more luxury end of the goods spectrum, even though a lot of that goods and services spending has shifted into that services era or element.
You know, all that considered, if we were to see a shift among that consumer kind of appetite to go back into luxury, what is that net out for Walmart? How do they use this time from your perspective to really kind of capture the attention that has been thrust back towards their direction?
JHARONNE MARTIS: I think in terms of Walmart, when consumers think of Walmart, as we mentioned before, they've gained a lot of new consumers. The membership has gone up, especially from the high-end consumer. But that high-end consumer if they're going to gravitate towards extending themselves at Walmart is going to be with those big ticket items like electronics during the holiday season.
Walmart is not the destination for luxury items. In general, when we look at the forecast for the second half of the year, we do see that consumers will be sticking towards services. That's still where the money is gravitating towards. But to your question, if the high-end consumer were to splurge at Walmart, it would be more for towards electronics during the holiday season and during the fourth quarter.
BRAD SMITH: Just briefly here too, is there anything that we can extrapolate from this report about what the company is signaling in terms of back-to-school season, and the strength of this back-to-school season versus years past given all the projections that we've got from NRF and everybody and their grandmother at this point anecdotally in some of those cases?
JHARONNE MARTIS: So a lot of that Amazon Prime Week definitely drove-- move those back-to-school sales into the month of July. That's what we saw-- strong July US retail sales numbers. And a lot of that was driven because of the promotions. When you look at that Amazon Prime Week, and you went to any of the websites, Target, Walmart, the landing page was always back to school.
And parents no matter how the economy is doing back to school happens every year, and parents took advantage of those sales that were strong enough to entice them to open up their wallets. So we saw a lot of that back to school in July. We might see a slight pickup in September when students go back to school, eye what their classmates are wearing, and then go back to the mall to buy those latest fashion items.
BRAD SMITH: All right, latest fashion items for me, more flip-flops. Jharonne Martis, director of Consumer Research at LSEG, and Dean Rosenblum, who is the Bernstein senior research analyst US Retail. Thank you so much both of you for joining us this morning. Appreciate it.
JHARONNE MARTIS: Thank you.
DEAN ROSENBLUM: Thank you so much.