In this piece, I evaluated two big-box retail stocks, Walmart Inc. (WMT) and Dollar Tree, Inc. (DLTR), to determine a better investment. Based on a fundamental comparison of these stocks, WMT appears to have a better upside potential than DLTR for reasons explained throughout this article.

The inflation cooled in May to its lowest annual rate over two years. The Consumer Price Index (CPI) for the month rose 0.4% sequentially and 4% year-over-year. Cooling inflation is good news for big-box retailers like WMT and DLTR.

Despite the challenging macroeconomic conditions, retail sales continue to rise. Retail sales in May rose 0.3% sequentially. According to the National Retail Federation, retail sales will grow between 4% and 6% in 2023 to reach between $5.13 trillion and $5.23 trillion.

WMT surpassed the consensus EPS and revenue estimates in the first quarter. Its EPS came 11.6% above the consensus estimate, while its revenue beat analyst estimates by 2.9%. On the other hand, DLTR’s EPS missed the consensus estimate by 4.3%. However, its revenue came 0.7% above analyst estimates.

WMT’s President and CEO Doug McMillon said, “We had a strong quarter. Comp sales were strong globally, with eCommerce up 26%. We leveraged expenses, expanded operating margin, and grew profit ahead of sales.” The company’s global advertising business grew over 30%, while its operating margin rose by 34 bps.

DLTR’s Chairman and CEO Rick Dreiling said, “Our initiatives to drive customer traffic and increase store productivity are having the desired impact. The Dollar Tree segment delivered a 3.4% comp, successfully cycling the 11.2% comp from the prior year’s quarter. Family Dollar continued its sales momentum with a 6.6% same-store sales increase.”

“Importantly, both segments experienced a mid-single digit percent step-up in comp traffic. We are clearly gaining market share across the entire enterprise. While we are seeing early results from our initiatives, we are not immune to the external pressures affecting all of retail, notably, the margin impact of elevated shrink and the product mix shift to consumables,” he added.

WMT expects its consolidated net sales for the second quarter to rise by approximately 4%, while its consolidated operating income is expected to decline by about 2%. Its adjusted EPS is expected to come between $1.63 and $1.68. Moreover, for fiscal 2024, its consolidated net sales are projected to rise by approximately 3.5%.

Its consolidated operating income for the year is expected to increase by approximately 4% to 4.5%. The company’s adjusted EPS is expected to come between $6.10 and $6.20.

DLTR expects its second-quarter net sales to come between $7 billion and $7.2 billion. Its EPS is projected to be between $0.79 and $0.89. The company’s net sales for fiscal 2023 are forecasted to come between $30 billion and $30.50 billion, while its EPS is expected to come between $5.73 and $6.13.

When it comes to price performance, WMT is the clear winner. WMT’s stock has gained 11.2% in price year-to-date compared to DLTR’s 2.1% decline. In addition, WMT’s stock has gained 32.1% over the past year, compared to DLTR’s 10.4% decline.

Here are the reasons I think WMT could perform better in the near term:

Recent Financial Results

WMT’s total revenues for the first quarter ended April 30, 2023, increased 7.6% year-over-year to $152.30 billion. Its net cash provided by operating activities came in at $4.63 billion, compared to net cash used in operating activities of $3.76 billion in the prior-year quarter. The company’s operating income rose 17.3% over the prior-year quarter to $6.24 billion.

In addition, its consolidated net income attributable to WMT came in at $1.67 billion. Also, its adjusted EPS came in at $1.47, representing an increase of 13.1% year-over-year.

DLTR’s total net sales for the first quarter ended April 29, 2023, increased 6.1% year-over-year to $7.32 billion. Its adjusted operating income declined 38.5% over the prior-year quarter to $449.70 million. The company’s adjusted net income fell 39.4% year-over-year to $325.10 million. In addition, its adjusted EPS came in at $1.47, representing a decline of 38% year-over-year.

Expected Financial Performance

Analysts expect WMT’s EPS for fiscal 2024 to decline 0.9% year-over-year to $6.23. Its revenue for fiscal 2024 is expected to increase 4.6% year-over-year to $633.88 billion. Its EPS and revenue for fiscal 2025 are expected to increase 10.7% and 3.7% year-over-year to $6.90 and $657.54 billion, respectively.

For fiscal 2024, DLTR’s EPS is expected to decline 16.3% year-over-year to $6.04. On the other hand, its revenue for fiscal 2024 is expected to increase 7.2% year-over-year to $30.36 billion. Its EPS and revenue for fiscal 2025 are expected to increase 21.5% and 4.2% year-over-year to $7.34 and $31.63 billion, respectively.

Profitability

WMT’s trailing-12-month revenue is 21.6 times what DLTR generates. WMT is more profitable, with a levered FCF margin and Return on Assets of 3.38% and 8.47%, compared to DLTR’s 0.63% and 6.50%, respectively. Also, WMT’s asset turnover of 2.53x compares to DLTR’s 1.26x.

Valuation

In terms of forward EV/Sales, WMT is currently trading at 0.77x, 41.2% lower than DLTR’s 1.31x. WMT’s forward EV/EBITDA ratio of 12.94x is 12.3% lower than DLTR’s 14.76x.

On the other hand, in terms of forward non-GAAP PEG, DLTR is currently trading at 2.18x, 34.9% lower than WMT, which is currently trading at 3.35x. Furthermore, DLTR’s forward P/E GAAP ratio of 23.51x is 20.1% lower than WMT’s 29.41x.

POWR Ratings

WMT has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, DLTR has an overall rating of C, translating to a Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

WMT has a B grade for Quality, in sync with its high profitability. On the other hand, DLTR has a C grade for Quality, consistent with its mixed profitability.

WMT and DLTR’s mixed valuation justify their C grade for Value.

Of the 37 stocks in the A-rated Grocery/Big Box Retailers industry, WMT is ranked #6, while DLTR is ranked #33 in the same industry.

Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Stability, and Sentiment. Click here to view WMT’s ratings. Get all the ratings of DLTR here.

The Winner

Retail sales remain robust amid macroeconomic challenges, indicating the economy’s strength. Despite the chances of a recession, big-box retailers are likely to perform well as they sell essential items that fall under non-discretionary expenditure, helping them perform better than other sectors. Moreover, retail sales will likely increase 4% to 6% this year.

Both WMT and DLTR expect strong sales and earnings growth during the year. Although both stocks remain well-positioned to benefit from strong consumer spending, it could be wise to buy WMT now, given its high profitability and strong fundamentals. On the other hand, it could be wise to wait for a better entry point in DLTR, given its mixed fundamentals and valuation.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Grocery/Big Box Retailers industry here.

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WMT shares were trading at $157.46 per share on Friday morning, down $0.27 (-0.17%). Year-to-date, WMT has gained 11.93%, versus a 15.93% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...

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