Target Vs Walmart: Which Is The Better Investment (NYSE:WMT) (2024)

My first two articles for Seeking Alpha, published around Christmas of 2013, were on Walmart Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT). I am a dividend growth/value investor, as are most who follow my work on SA. On occasion, in the commentary that follows one of my pieces, a growth-oriented investor will feel compelled to chastise the DGI crowd for pursuing stocks akin to Walmart and Target.

So what would your returns be had you invested in Target and Walmart in late December of 2013.

Your WMT shares would be worth about 1.8X the initial cost, while an investment in TGT grew by nearly 3.1 times, not including dividends. An equal sum devoted to both retailers provides you with a 245% gain.

An investment in an S&P 500 ETF would have appreciated by 213%.

Therein lies the strength of an investment in dominant, dividend growth companies.

In a market in which many equities were crippled by COVID, these two retailers flourished as “essential” businesses.

Furthermore, both firms made impressive strides in the ecommerce and omnichannel arenas. Furthermore, Walmart and Target are not resting on their laurels. Each retailer is engaged in initiatives designed to grow the respective businesses.

The question is, which of the two is the better investment?

Comparing Recent Results

Comps Revenue ecommerce

WMT Q3 6.4% 5.2% 79%

Q2 9.3% 5.6% 97%

Q1 10% 8.6% 74%

TGT Q3 20.7% 21% 155%

Q2 24.3% 24.7% 195%

Q1 10.8% 11.3% 141%

(All stats represent percent growth YoY)

Data: WMT & TGT Quarterly Reports

Walmart: A Slew Of Initiatives

Last November, Walmart announced the sale of its business in Argentina to Grupo de Narvaez. Active in Argentina since 1995, Walmart was the ninth largest private employer in that country.

Walmart is also selling 85% of its stake in Seiyu, a Japanese supermarket chain. Expected to close in the first quarter of 2021, Walmart will receive $1.6 billion for its stake, but management expects to book a related non-cash $2 billion loss in the fourth quarter of FY 2020 for the deal.

Back in the U.S. of A, the company is hoping to aid in the recovery from COVID-19 while simultaneously driving foot traffic. Management advised the federal government that it has trained thousands of pharmacists and pharmacy techs” to administer vaccines. The company has the capacity to provide 10 to 13 million doses per month.

This dovetails well with Walmarts move last October to provide health insurance and with the company’s nascent initiative to provide stand-alone health clinics, offering patients a wide range of services.

In an unrelated development, the Wall Street Journal reported the company is acquiring the technology and assets of Paper G, an ad tech firm that does business as Thunder Industries. The goal is to use data mining to assist advertisers in their efforts to create personalized digital advertisem*nts. The technology aids in targeting certain customer demographics and gives advertisers the ability to gauge the effectiveness of their efforts.

This builds on Walmart's current digital advertising business and enhances its ability to utilize the data it gleans from billions of annual retail transactions. The Journal states that although Walmart doesn’t provide financials on its advertising business, management claims revenue from that source doubled last year.

The Journal was also the first to report on a prospective deal between Walmart and Comcast (CMCSA) to sell smart televisions embedded with the latter company’s software. Designed to compete with Roku (ROKU), the TVs might carry Walmart’s brand. Walmart would also harvest a percentage of the recurring payments from viewers using Comcast’s software.

Perhaps another source of revenue will be derived from the firm’s efforts to "develop and offer modern, innovative, and affordable financial solutions." Walmart is partnering with Ribbit Capital to create a new fintech. Studies by the FDIC determined approximately 7.1 million US households have no checking or savings account, and it is reasonable to believe that many of those people shop in their local Walmart. Consequently, management sees this as a prime opportunity.

In efforts to enhance its omnichannel reach, the company will test a program this coming spring in Bentonville, Arkansas. Walmart is partnering with HomeValet to provide an internet-of-things-connected “smart box”.

The container, installed on the customer's property, will have separate compartments for non-refrigerated, refrigerated, and frozen items. Locked and with access restricted to the homeowner and delivery personnel, it gives the retailer a seamless means to accept orders and schedule deliveries at the convenience of the consumer.

Walmart is also teaming up with Cruise in an experiment to provide contact-free deliveries to customers in Scottsdale, Arizona. Management hopes this partnership will enhance the Express Delivery program, Walmart+, launched last year. Express Delivery is currently offered at 2,800 Walmart stores in the US.

Although management did not release subscription numbers on the latest earnings call, a study by Piplsay Research estimates 11% of Americans signed up for Walmart + within two weeks of its debut. Peruse the two charts below to weigh the full impact of this development.

Source

Source: Piplsay

I see the above stats as a major positive for the stock moving forward.

Walmart+ offers expedited checkout, free next-day or two-day shipping on all orders except groceries, which require a $35 minimum order, and discounts on gas.

Working through FedEx (FDX), subscribers also have free returns.

Target Hit The Bull’s Eye

The investment thesis for Target isn’t about future plans, it is more about how past plans played out.

Yes, the company has a few initiatives in its pipeline. One is an agreement with Ulta Beauty (ULTA) to create “shop-in-shop” concept stores in 100 Target locations. With approximately 1,000 square feet of retail space, they will measure about a tenth of the size of stand-alone Ulta stores.

Those are expected to be in place by the second half of 2021.

Another recent development is an exclusive partnership with Levi Strauss (LEVI). Known as the Levi’s for Target program, it will provide a limited edition collection of merchandise as disparate aa quilts, pillows, tableware, pet supplies, and apparel. The goods will be offered for a limited time beginning this fall.

This move fits well with Target’s ability to drive sales with its private label brands. The company now has 10 Target brands with $1 billion or more in sales, with four of those brands exceeding $2 billion.

However, where Target truly excels is in the company’s ability to marry in-store and online shopping experiences. With its investment in Shipt and same-day fulfillment centers, which include drive-up, order pickup and same-day delivery, the retailer has hit a chord with its customer base.

Target’s CEO has stated the cost of executing online orders falls by 90% when customers use same-day shopping and pickup from local stores.

Source

According to Target management, in Q3, over half of the packages the company shipped and 75% of digital sales were fulfilled by its stores

Altogether, our third quarter digital sales grew more than $2 billion compared with last year. For perspective, $2 billion is more than our company's total digital sales for the entire year in 2014.

John Mulligan, COO, Target

Target’s strength in this arena is reflected in Shipt. Acquired in 2017 for $550 million, the delivery service is now valued at $14 billion. Shipt is more than an in house service, as it now provides deliveries for over 100 national and regional retailers, including Costco (COST), Kroger (KR) and CVS (CVS) pharmacies.

Consider this, between the first three quarters of 2014 and the same period this year, the compound annual growth rate of Target’s digital sales was 45%.

Target Vs. Walmart: Which Is A Better Buy?

While both companies possess investment grade debt, Walmart debt is in the AA range, Target’s in the single A range. This places Walmart’s debt in the High Grade range and Target’s in the Upper Medium Grade range. Both companies own about 85% of their domestic stores.

In some other cases, WMT owns the retail stores but leases the land.

Argus estimates Walmart’s debt to EBITDAR at the end of Q3 2021 at 1.9X, and Target’s at 2.0.

Both companies exhibit very strong debt profiles, particularly for retailers. The fact that the companies own the bulk of their properties is an obvious competitive advantage.

Advantage: WMT

As I type these words, WMT shares sell for $144.47. The average 12-month price target of the 15 analysts rating the stock since the last quarterly report is $164.13.

TGT shares sell for $191.43. The average 12-month price target of the 8 analysts rating the stock since the last quarterly report is $205.87.

Advantage WMT

WMT has a current PE of 20.79, a forward PE of 25.04 and a PEG of 3.00

Target’s current PE is 25.24, with a forward PE of 21.87 and a PEG of 1.84.

Advantage TGT

The following chart provides growth rates using five metrics. I obtained the data from Seeking Alpha’s Premium Service. The definition of the data sets is as follows:

“The forward growth rate is a compounded annual growth rate from the most recently completed fiscal year’s revenue (FY-1) to analysts' consensus revenue estimates for two fiscal years forward (FY2).”

Source: Data Seeking Alpha/ Chart by Author

Advantage TGT, by a wide margin.

Whenever I develop an interest in a stock, my first step is to review Seeking Alpha’s Factor Grades.

The Factor Grades for WMT: Value B- Growth C- Profitability A+

The Factor Grades TGT: Value C+ Growth C Profitability A+

I then compare the valuation score to a rating system I’ve developed over a number of years. My system attaches a number value to a variety of metrics. I will use a grading system for the results similar to Factor Grades to aid readers in understanding the system’s results.

WMT received a B- from my system, TGT a C-.

Advantage WMT.

Is Walmart A Better Retailer Than Target?

It is common to describe Target and Walmart as direct competitors. While the companies have obvious similarities, in fact, the two retailers appeal to different demographic groups.

The data that follows comes from PYMNTS.com and Stifel analyst Mark Astrachan, via Barron’s.

While the majority of shoppers for both stores are female (WMT >50 percent), Target's base shoppers are 60% to 63% female.

From 58% to 62% percent of Target's shoppers are between the age of 18 and 44. Shoppers falling in that age group represent 48% of Walmart customers.

Only 12% of Target’s customers are 65 or older. The smallest percentage of any of the retailers studied.

Shoppers aged 25- to 34-year-old frequenting Target are more affluent than those shopping at competitors' stores. Their average income is $65,000, about $12,000 above those shopping at rival retailers.

Among those who make over $100,000 a year, Target leads other retailers by a wide margin.

Those making more than $50,000 per year constitute more than 60% percent of Target's shoppers. By contrast, only 45& of Walmart's customers earn that sum.

Target shoppers are 40% more likely to opt for same-day service options than consumers favoring other retailers. That compares to 38% for Walmart shoppers and 36% for other retailers. This preference leads to increased comparable store sales.

While much of the data is favorable for Target, there is a caveat: the demographic cohorts described are a close match those of Amazon’s.

The answer to the question posed is, unfortunately, that depends. In fact, the two retailers appeal to differing consumers. A reasonable argument can be made that each has its own strengths and weaknesses.

Target vs. Walmart: Which Is The Dividend Investors' Pick?

As a Dividend Growth Investor, yield and dividend growth are of primary interest to me.

WMT Yield: 1.50% Five-year growth rate: 2.0%

TGT Yield: 1.43% Five-year growth rate: 6.5%

Target has a payout ratio a bit below 30%. Walmart’s payout ratio is nearly 39%.

While both companies have safe dividends, Target’s payout ratio and five-year growth rate indicate Target is likely the better pick for dividend growth investors.

Using the rule of seventy two, it will take about 11 years for Target’s dividend to double. It will take nearly four decades before Walmart investors will see a doubling of the dividend, assuming the current growth rates continue.

My Perspective

Although Walmart’s last three quarters have been more than solid, Target’s can rightly be described as spectacular. It is reasonable to claim that Target’s management team is exemplary.

While Target experienced a great deal of growth in ecommerce, as the second largest ecommerce retailer, Walmart still leads by a wide margin.

Furthermore, while Walmart garnered $10.3 billion in US ecommerce sales, that represents a small fraction of the company’s total revenue.

While the two companies’ operations often overlap, each has a strong appeal to a differing demographic. Additionally, over half of Walmart’s sales are from its grocery segment. Groceries drive foot traffic for Walmart’s other offerings to a much greater degree than does Target’s relatively modest grocery section.

This leads me to an important difference between the two rivals.

On average, Target has 30 million customers walk through its doors each week. Walmart has 150 million consumers in store and another 115 million online customers each week.

The sheer size of Walmart provides that company with a moat. This stems from its ability to use scale to hold down costs and leverage relationships with suppliers, thereby providing the retailer with an unassailable price advantage over competitors.

While Target has a strong appeal to a wide variety of consumers, there is no tangible, enduring advantage that I can discern in the company’s offerings.

Considering the growth metrics I provided in this article, I believe Target stock will outperform that of Walmart over the short to mid term. However, for the risk-averse investor, Walmart is arguably the better investment.

Although I believe both companies will experience long term benefits from consumers flocking to their stores during the pandemic, I am of the opinion that many will return to their prior shopping habits once we return to normal.

I also consider both companies to be trading at rich valuations.

Walmart has a forward PE more than 4 points higher than its current PE. Target’s current PE of 25.4 is well above its five-year average of 15.2.

Consequently I rate both stocks as a HOLD.

One Last Word

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