Walmart and Target clash with investors over low-price strategy

Walmart and Target put up strong third-quarter performances this week, beat Wall Street’s expectations and spoke of holiday shoppers already starting to splurge on gifts and gatherings this season. Yet the investor response was swift: A brutal sell-off.

Target shares were down about 5% Wednesday. Walmart closed down nearly 3% on Tuesday, after its earnings report. Shares continued to drop Wednesday, erasing all its gains year-to-date.

The two sides are at odds on the retailers’ strategy of absorbing some of the rising costs of shipping, labor and materials rather than passing them on to customers with higher prices. Both Walmart CEO Doug McMillon and Target CEO Brian Cornell have drawn a clear line. Their strategy: Keep prices low in a bid for customer loyalty — even if it means a hit to profits.

The pushback they’re hearing is: Why not charge shoppers more? Americans have had a ravenous appetite for shopping. They socked away money during the pandemic and the holiday forecasts are rosy.

McMillon said Walmart must uphold its reputation for value — or risk scaring away customers who feel sticker shock. He invoked the big-box retailer’s founder in an interview on Tuesday with CNBC’s “Squawk on the Street.”

“We save people money and help them live a better life,” he said. “Those are the words that came out of [Walmart founder] Sam Walton’s mouth. He loved to fight inflation. So do we.”

Cornell said Target is playing the long game, too, even as that means swallowing extra costs.

“We are protecting prices,” he said on a call with reporters. “It’s as important to our guests this year as safety has been throughout the pandemic.” 

He and the company’s team of executives defended that strategy, even as they were peppered with questions by analysts on an early Wednesday earnings call.

Target, in particular, has seen eye-popping numbers that make for tough comparisons. The company’s 2020 sales grew by more than $15 billion — greater than its total sales growth over the prior 11 years. And its stock, even with Wednesday’s selling, is up more than 43%, putting its market value at more than $123 billion.

Target has touted its market share gains frequently on calls with investors. It picked up about $9 billion in market share in the fiscal year ended Jan. 30, based on research by the company and third-parties. It said it gained another $1 billion in market share in the first three months of this fiscal year.

Now, both retailers face new complexities. Consumers are juggling added expenses, from commutes to the office to vacations and meals at restaurants. They are spending through the extra cash that they saved up during the earlier part of the pandemic or received from stimulus checks. And they are seeing the price of groceries, gas and…