High inflation and deepening supply chain disruptions due to the Russia-Ukraine conflict and lockdowns in various countries have resulted in increased consumer spending. The core personal consumption expenditures price index rose 4.9% year-over-year in April. However, data suggests that consumers tapped into their savings to meet their daily expenses. Given this backdrop, the popularity of discount retailers is expected to rise substantially. According to a CNBC report, consumers are rushing to discount stores that offer general merchandise at comparatively lower prices than traditional retail stores.
Walmart Inc. (WMT) and Target Corporation (TGT) are two leading discount store operators based in the United States. WMT operates retail, wholesale, supermarkets, other units, and e-commerce websites worldwide. The company operates through Walmart U.S.; Walmart International; and Sam’s Club. It also offers fuel and financial services and related products. TGT operates as a general merchandise retailer that offers food assortments, apparel, accessories, home decor products, electronics, seasonal offerings, and beauty and household essentials through its stores and digital channels. As of January 30, 2021, the company operated approximately 1,897 stores.
Year-to-date, WMT is down 13.3% and TGT has fallen 32.3%. Which of these stocks is a better pick now? Let’s find out.
Latest Developments
On March 7, 2022, WMT and Space NK, a British retailer of personal care and beauty products, announced a collaboration called BEAUTYSPACENK to bring prestige beauty products to Walmart.com and Walmart stores nationwide this summer. The partnership leverages WMT’s size and scales with Space NK’s assortment of high-quality beauty brands and products. By offering a wide variety of price points across skincare, makeup, haircare and bath, and body, WMT should witness high demand for Space NK in the coming months.
On February 23, 2022, TGT unveiled plans to continue enhancing its fast-growing, same-day pickup services in fall 2022. To create a differentiated shopping experience, the company will begin to add an order from Starbucks Corporation (SBUX) or make a return within TGT’s free, contactless curbside service through the Target app. It will also expand its “backup item” functionality in more categories. The company’s Order Pickup, Drive Up, and Same-Day Delivery with Shipt services will continue to expand its digital business.
Recent Financial Results
WMT’s total revenues for its fiscal 2023 first quarter ended April 30, 2022, increased 2.4% year-over-year to $141.57 billion. The company’s operating income came in at $5.32 billion, representing a 23% decline from the year-ago period. While its consolidated net income decreased 25.2% year-over-year to $2.10 billion, its adjusted EPS fell 23.1% to $1.30. As of April 30, 2022, the company had $11.82 billion in cash and equivalents.
For fiscal 2022, the first quarter ended April 30, 2022, TGT’s total revenue increased 4% year-over-year to $25.17 billion. The company’s operating income came in at $1.35 billion, representing a 43.3% decline from the prior-year period. Its net earnings came in at $1.01 billion, down 51.9% from the year-ago period. TGT’s adjusted EPS came in at $2.19, indicating a 40.7% year-over-year decline. As of April 30, 2022, the company had $1.11 billion in cash and cash equivalents.
Past and Expected Financial Performance
Over the past three years, WMT’s revenue, net income, and EPS have increased at CAGRs of 3.8%, 15.8%, and 17.6%, respectively.
WMT’s EPS is expected to decrease 0.8% year-over-year in fiscal 2023, ending January 31, 2024, and rise 8.9% in fiscal 2024. Its revenue is expected to grow 4% in fiscal 2023 and 3.4% in fiscal 2024. Analysts expect the company’s EPS to rise at a 9.5% rate per annum over the next five years.
Over the past three years, TGT’s revenue, net income, and EPS have grown at CAGRs of 12%, 24.8%, and 28.6%, respectively.
Analysts expect TGT’s EPS to decline 21.8% year-over-year in fiscal 2022, ending January 31, 2023, and rise 25.5% in fiscal 2023. Its revenue is expected to grow 4.1% year-over-year in fiscal 2022 and 4.3% in fiscal 2023. Analysts expect the company’s EPS to grow at a 19.6% rate per annum over the next five years.
Valuation
In terms of forward EV/Sales, TGT is currently trading at 0.83x, 16.9% higher than WMT’s 0.71x. In terms of trailing-12-month Price-to-Book, WMT’s 4.49x compares with TGT’s 6.74x.
Profitability
TGT’s trailing-12-month revenue is 5.4 times WMT’s. TGT is also more profitable, with a 10% EBITDA margin versus WMT’s 6.1%.
Furthermore, TGT’s ROE, ROA, and ROTC of 45.5%, 9.9%, and 17.2% compare with WMT’s 15.5%, 6.3%, and 10.1%, respectively.
POWR Ratings
While WMT has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, TGT has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
WMT has a B grade for Stability, in sync with its relatively low 0.50 beta. On the other hand, TGT has a Stability grade of C. The stock’s relatively high 0.94 beta justifies its Stability grade.
Of the 38 stocks in the A-rated Grocery/Big Box Retailers industry, WMT is ranked #13, while TGT is ranked #33.
Beyond what we have stated above, our POWR Ratings system has graded WMT and TGT for Value, Quality, Stability, and Growth. Get all WMT ratings here. Also, click here to see the additional POWR Ratings for TGT.
The Winner
Increasing consumer spending and foot traffic at retail stores should allow WMT and TGT to profit substantially in the coming months. However, relatively lower valuations make WMT a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Ratings of Buy or Strong Buy. Click here to access the top-rated stocks in the Grocery/Big Box Retailers industry.
WMT shares were trading at $125.76 per share on Thursday morning, up $0.31 (+0.25%). Year-to-date, WMT has declined -12.43%, versus a -13.02% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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