Question

In January 2019, Target's ROIC is 15% compared to Wal-Mart's 11%. Explain why the ROIC is higher for Target.

Answer 1

Target’s ROIC has surged as it has sold off unprofitable business lines and refocused on its core competencies. Wal-Mart’s ROIC has gone in the opposite direction as it has overpaid for acquisitions and seen its already thin margins further squeezed by rising labor costs.Though Wal-Mart’s profitability dominated Target for most of the last twenty years, we’ve seen Target make some big improvements while Wal-Mart has faltered. Right now, Target is the more profitable company, and that edge is expected to last.

Target Corp (TGT), operates approximately 1,800 stores in the United States. Target has utilized a low pricing strategy similar to Walmart, but is more focused on the e-commerce platform, experiencing over 30% of e-commerce sales growth in 2018. Instead of mega-stores like Walmart, Target's business model focuses on slightly smaller stores, focusing less on direct bottom-line savings than on a younger commercial draw. TGT focuses on smaller stores thus the investment required is less then as compared to Wal-Mart which has to invest higher amount of capital for huge store it operates.