How Are Target and Wal-Mart Doing in the Battle Against Amazon?

By Markets Fool.com


Image source: Getty Images.

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Every year, consumers do more and more of their shopping online. Global online sales grew about 25% last year, according to eMarketer. But some big-box retailers are having trouble keeping up with the market's rapid growth.

Target (NYSE: TGT) grew its online sales just 16% last quarter. That's a decline from 30% a year ago. Wal-Mart (NYSE: WMT), among the largest online retailers in the world, grew online sales just 12% last quarter. That's actually an improvement from the previous two quarters when it reported single-digit online sales growth.

Both companies are now trailing Amazon's (NASDAQ: AMZN) sales growth, which has accelerated over the last two years.


Source: Target, Wal-Mart, Amazon financial reports

The steep declines in Target's online sales growth indicate that it's on the same path as Wal-Mart when it comes to digital sales. That's bad news for investors. Here's why.

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Comparable-sales growth depends on online sales

During the fourth quarter last year, Target managed to increase its online sales 34%. Those sales contributed 1.3 percentage points to the company's comparable-store sales growth of 1.9%.

With the deceleration in online sales growth to 16% last quarter, comparable store-sales fell 1.1%. Digital sales only contributed 0.5 percentage points to Target's comparable sales growth.

Target expects comparable sales to stay negative during the third and fourth quarters.

Continued deceleration in online sales will emphasize the decline in foot traffic and sales in Target's brick-and-mortar stores. CEO Brian Cornell told analysts during the second-quarter earnings call that the "number one challenge was traffic."

Target must compete against other retailers like Wal-Mart to attract customers to their stores when they could simply go online. Wal-Mart is winning the battle here, having increased traffic to its stores seven straight quarters. Last quarter, traffic increased 1.2% at Wal-Mart's stores.

Big investments ahead?

Wal-Mart just spent $3.3 billion to acquire Jet.com, a relatively small e-commerce company that launched last year. On top of that, Wal-Mart plans to spend $900 million on its regular e-commerce operations this year and $1.1 billion next year. Those are steep increases from the $700 million the company spent on e-commerce in 2015.

It may be too early to tell if Wal-Mart's investments are paying off. Online sales growth recovered last quarter, but growth was still slower than the second quarter of 2015.

Target, meanwhile, has already committed to increasing its spend on technology and supply chain infrastructure to support its online sales. The company is investing $1.8 billion in improvements, up from $1 billion last year. Starting in 2017 it expects to invest $2 billion to $2.5 billion per year.

Those are significant increases in investments, especially considering the lack of revenue growth at the retailer. But both Target and Amazon are going head-to-head with Amazon in online sales. Amazon continues to invest in growing its retail operations. Amazon spent $1.7 billion on capital expenditures last quarter alone, although a big part of that went to support its AWS cloud computing platform.

Still, Amazon is investing in more fulfillment centers to support its growing Prime membership. It's also investing in improving the Prime benefits beyond two-day shipping. On top of all that, Amazon is working to develop new private-label products to undercut pricing at Wal-Mart and Target, which both stock their own private labels as well.

Target's ability to capitalize on its investments in online sales will start to show over the next few quarters, but it might not be long before we see online sales growth dip into single digits, putting further pressure on comparable-store sales growth. If Target becomes desperate, we could see it move to make a big acquisition of smaller online retailers or develop strategic partnerships to bolster online sales.

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Adam Levy owns shares of Amazon.com. The Motley Fool owns shares of and recommends Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.