Why Walmart has the upper hand over Target: Analyst

Walmart (WMT) saw strong e-commerce sales in its first quarter, with delivery business volume surpassing in-store pickups. TD Cowen Senior Research Analyst Oliver Chen joins The Morning Brief to break down the retail giant's performance as consumer wallets tighten amid sticky inflation.

Chen calls Walmart a "top pick," saying it offers "both needs and wants" of the consumer. He says the grocery business remains critical to Walmart, accounting for over 50% of its revenue. However, the company also offers great value for bigger ticket items.

He points to the Walmart+ membership program as an area gaining momentum, offering customers free shipping and savings on gas, among other perks.

While Target (TGT) has been pushing higher-end apparel, like its collaboration with Diane von Furstenberg, Chen says that Walmart "does a great job" with staples like underwear and basic apparel. "The opportunity is for Walmart to be more like a lifestyle brand and apparel, and expand into dresses, amplify their presence in denim, and trade the customer up," he explains. He adds that the company has already started to remodel stores and add more private-label brands to appeal to higher-end consumers.

"We also see what we say is 'customized moderation,' meaning customers are both scrambling and splurging, trading up and trading down...Everybody wants to look good and fashionable, and you can do that at a very good price," he says.

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Melanie Riehl

Video transcript

Walmart seeing strong ecommerce sales during the first quarter with its delivery business volume, surpassing in store pickup.

We spoke with Walmart CFO John David Raine about the state of the consumer and here's what he had to say, the consumer has been relatively consistent.

We are like everyone else is looking for.

Uh if there's something there, something that we should be more aware of, but they've been pretty consistent quarter to quarter here.

We see that wallets are still stretched, they're still looking for value.

They're still using discretion with buying those those higher income items we wanna bring in Oliver Chen.

He's TV Cowens a senior research analyst, Oliver, it's great to see you.

I'm curious just to get your rea reaction to what we just heard from Jon David.

And if we are seeing the consumers still willing to spend, although we are seeing some pressure, what in turn, does that ultimately mean for Walmart here in the coming quarters?

Yeah, Shana Walmart's our top pick.

It's great to be here with you.

What Walmart offers is both needs and wants.

So on the needs side, grocery remains critical.

Also offering the consumer extremely great value what we see is a bifurcated consumer, a pressured consumer at the low and middle end and a consumer who's balancing more expensive needs, it still wants other items.

General merchandise, non-food has been a little bit bumpier.

But keep in mind, Walmart is the country's leading grocer and over 50% of the revenue is related to food.

So it's a bit mixed bottom line.

A consumer is under pressure.

So there continues to be casious optimism in terms of the rewards programs that are out there.

Oliver, I mean, Walmart offering its rewards program for members.

You've got Amazon that they're going up against as well with their very noted prime membership.

And then of course other entrance into the space, whether that be the Behemoths that are kind of the legacy um buy in bulk of bjs and Costco.

But then you know, the there's also target, of course out there.

So all of these things considered, where is the best bang for a consumer buck when it does come to some of these membership programs.

Yeah.

What customers love about Walmart plus is Gas and Walmart Plus is this entire ecosystem of delivery specials as well as Paramount and media?

And Walmart is a big part of Americans lives just given the sheer footprint of 4000 stores, 90% of the US is within 10 miles of a Walmart.

So it's a very trusted brand and Walmart Plus is a great momentum as we think about artificial intelligence technology, Walmart being a tech company, this membership model, the marketplace model and digital advertising.

All of these really work together, Brad, the other marketplace in terms of membership model that we really like is Costco and Costco in many ways is a not even a retailer.

It's a membership club where most of the profits are due to that.

The so we see this evolving but it will increase in competition and it's very hard.

These programs need to have multifaceted value.

Oliver, what about the ability here to retain some of the new customers that Walmart has won over over the last couple of quarters.

Are you confident they will be able to do that and why?

Why not?

Yeah, Sean and we're excited about that higher household income customers have been coming to Walmart in part because of the convenience, the speed and the customer satisfaction.

So enabling marketplace having products like apple fragrances like burberry goddess uh that really elevates Walmart as a whole and then having curbside pick up, you don't have to go in the store.

Adding convenience has been a big factor uh as well as being clean, fast and friendly.

So executing on both and all consumers appreciate low prices.

So this whole ecosystem is working and when you do experience curbside, pick up your net promoter scores are high, you recommend it to others and you do come back, Oliver, I I mean, you're a very fashionable person.

We talk about this all the time, we see it all the time as well.

Here, you've seen more of these collaborations between companies like, like Target and Diane Von Furstenberg and uh making sure that they're kind of showing that higher end consumer as well that hey, those same brands, the same manufacturers or, or fashion houses, we have the ability to partner with them too.

What does that look like for some of the Walmart's, the targets of the world?

And in order to make sure that they are to Shawna's point retaining that higher end consumer, even after we see a much rosier macroeconomic scenario.

And Walmart's making big strides in apparel.

The problem is uh Walmart does a great job with basics such as underwear and basic apparel.

The opportunity is for Walmart to be more like a lifestyle brand and apparel and expand and the dresses amplify their presence in denim and trade the customer up.

Uh We we see a lot of innovation in the new store remodels as well as brands that are adding to their portfolio as well as private label.

So looking ahead, um that should be really exciting.

We also see what we say is customized moderation, meaning customers are both scrumping and splurging trading up and trading down.

So today's customer goes high goes low in a, in a really unique way and everybody wants to look good and fashionable and you can do that at a very good price.

And the other category we've always loved is beauty.

Uh Our favorite ideas are Ulta and Elf and, and beauty is about investing in your face and body and wellness and essentials.

Uh Walmart and Target have big opportunities there as well.

So overall, we're excited about the journey ahead and Walmart, as you think about it more broadly, social media, short form video um using some having their own movie during Christmas time, this will continue to build Walmart as a lifestyle brand as well for younger customers as well.

I mean, is that, is that movie during Christmas time?

More Hallmark channel or is it more, you know, uh uh box office type of picture?

Uh They're all over.

I think that's the question that a lot of potential viewers wanna know.

Yeah, I think they've struck a really good balance and it's exciting.

Um Lindsay Lohan mean girls, some great commercials, some great um rethinking about, you know, how they position the brand.

Uh that's fun, fast, friendly, convenient tech enabled.

Um All these factors, you know, are something Walmart's considering as it continues to modernize, yet still offer just great prices, great grocery, great execution and balancing this, you know, as the customers evolve at large, Oliver Chen TD cow and senior research analyst, Oliver, always a pleasure to see you and get some of your insights.

Thanks for taking the time.

My pleasure.

Thank you.