Wal-Mart is gobbling up its competitors' market share — and it's only just begun.
As the world's largest retailer moves further along with its price cuts, and begins to reap the benefits of its pending acquisition of Jet.com, analysts expect the company's advantage to grow.
Wal-Mart has already started to break away from the pack, logging a 1.6 percent increase in domestic comparable sales in the recently ended quarter. That compared to same-store sales growth of 1.2 percent at Dollar Tree, an 0.7 percent lift at Dollar General and a 1.1 percent dip at Target.
Wal-Mart's traffic also rose for the seventh straight quarter. Meanwhile, Target welcomed fewer shoppers into its stores for the first time in a year and a half, and traffic at Dollar General also slipped.
Cowen & Co. analyst Oliver Chen on Monday raised his rating on Wal-Mart to "outperform" from "market perform," saying it's only one-third of the way through the upgrades to its store experience. Improvements so far have included better training and pay for its workers, resulting in stores being cleaner and more convenient to shop.
As Wal-Mart invests more of its own dollars so it can lower prices for customers, the retailer should continue grabbing share from dollar stores, grocers and fellow mass merchant Target.
Price cuts are already showing up on Wal-Mart's shelves. A new study by Jefferies found that between June and August, Wal-Mart widened the pricing gap versus Dollar General, Family Dollar and most grocers.
Target has responded by lowering its prices on non-grocery items. But Jefferies analyst Daniel Binder, who reiterated his "buy" rating on Wal-Mart, said he expects Wal-Mart to step up its investments in non-grocery pricing during the fall and holiday seasons.
"We are seeing Wal-Mart's strategic initiatives beginning to pay off as traffic and basket grew in [the second quarter]," Binder said.
In tandem with its upgrade of Wal-Mart, Cowen's Chen downgraded shares of Target to "market perform" from "outperform."
"We believe Target has solid market share in the bigger 'stock-up' trips for customers, but the increasing price competition from Wal-Mart and the convenience of Amazon Prime will make the recent 'fill-in' trip weakness for Target persist," Chen said.
He noted that Amazon has been seeing "explosive" growth in several categories, most notably grocery and other consumables. Those account for roughly half of Target's sales.
While Target is in the process of reworking its food assortment, including bringing in more organic and local products, Chen expressed concern the retailer is not moving fast enough to roll out changes. Meanwhile, he expects more speed bumps from the rebranding of Target's pharmacies into CVS banners.
"In our view, Wal-Mart can use its scale to compete on price to regain or maintain market share versus Amazon ... but Target cannot compete as easily," Chen said.