Over the past couple of days, the stock markets have become extremely volatile because of the uncertainties surrounding the presidential election. There are several reasons why the stock market may remain volatile. The second wave of the coronavirus is one factor. 

During the first wave, big-box retail stocks outperformed. Consumer spending is resilient, and the holiday season is approaching. The largest retail chains such as Walmart, Inc. (WMT) and Kroger Company (KR) are poised to gain big in the upcoming months, with the hopes of a strong fiscal stimulus package reviving consumer spending to pre-pandemic levels.

However, choosing between the top two supermarket chains in the country might be challenging for investors. While WMT has an advantage of lower pricing generating higher sales turnover, KR’s quality organic products and groceries attract higher demand in certain categories. A survey conducted by Barclays established WMT’s average prices are around 4% lower than KR’s, giving it an edge over its biggest rival. However, for “fresh” items, KR takes the cake with a 3.7% advantage.

In terms of price performance, the two retail giants have generated decent returns over the past 10 years. While KR gained 187.8% over this period, WMT returned 160%. In terms of year-to-date performance, on the other hand, WMT is the clear winner with 20.1% gains versus KR’s 12.9% returns. As the stalled fiscal stimulus talks adversely affected the retail industry, WMT gained 1.6% over the past month, while KR’s return has been negative.

But which of these stocks is a better buy now? Let’s find out.

Latest Movements

KR recently partnered with Ria Money to provide hassle-free money transfer services domestically and across the globe to its customers. This move is likely to attract a larger customer base for KR, as well as improve its customer retention, given Ria’s competitive fees and hassle-free services.

On October 27th, KR announced an update in the Restock Update framework, which is expected to generate 8-11% returns through cost-saving and expansion strategies. The company generated $1 billion in cost savings and $6.4 billion through dividends and share repurchases since 2017.

KR’s Simple Truth brand is currently expanding to offer more than 75 types of organic plant-based, non-vegetarian foods, and beverages. As people are focused on developing healthy and organic eating habits across the country, this move should help KR reach new highs.

Unlike KR, WMT focused on improving its pricing strategy as well as developing a robust delivery system in the past couple of months to capitalize on the pandemic, as it already offers a wide assortment of products.

In this regard, WMT recently launched Walmart+, a subscription membership culminating delivery offering, scan and go online shopping, and fuel discounts integrated into one platform. This subscription service is relatively cheaper than Amazon Prime, giving WMT an edge.

On September 20th, WMT and Oracle received temporary approval from the government to acquire 20% of ByteDance, the parent company of TikTok. The United States is the leading market based on TikTok iOS revenue, with approximately $50.40 million user spending as of February 2020. TikTok’s seemingly large user base in the country should help WMT multiply its revenues through this investment.

Recent Financial Results

KR’s net revenues increased 8.2% year-over-year to $30.49 billion in the second quarter ended August 2020. This can be attributed to the 14.6% growth in identical sales and a 127% rise in digital sales. Operating profit grew 46.7% from the year-ago value to $820 million, while EPS increased 181.1% from the prior-year quarter to $1.03.

WMT’s revenues (constant currency) increased 7.5% year-over-year to $140.20 billion in the fiscal second quarter ended July 2020. This growth can be ascribed to a 9.3% rise in US comparative sales and a 97% rise in e-commerce sales over this period. Adjusted operating income (constant currency) rose 18.6% from the same period last year to $6.60 billion, while EPS grew 80.3% from the prior-year quarter to $2.29.

Thus, KR has an edge over WMT here.

Past and Expected Financial Performance

KR’s revenue and EPS grew at a CAGR of 3% and 25.4% respectively, over the past three years. The CAGR of its levered free cash flow has been 94.6%. The company’s EPS is expected to grow at 38.3% in the current quarter, 49.8% in the current year, and at a rate of 8% per annum over the next five years. The consensus revenue estimates indicate a 6.8% growth in the current quarter and 8.2% growth in the current year.

WMT’s revenue and EPS rose at a CAGR of 3.4% and 14.6% respectively, over the past three years, while its levered free cash flow increased at a CAGR of 16.8% over the same period. Analysts expect its EPS to rise 1.7% in the current quarter, 8.1% in the current year, and at a rate of 6.4% per annum over the next five years. WMT’s revenue is expected to grow by 3.1% in the current quarter, and 4.9% in the current year.

Additionally, both KR and WMT have impressive earnings surprise histories, as they beat the street EPS estimates in three out of the trailing four quarters. Nonetheless, KR’s higher growth potential puts the company in an advantageous position here.

Profitability

WMT’s revenue is 4.20 times what KR generates. WMT is also more profitable with a gross margin of 24.7% compared to KR’s 23.6%.

WMT’s ROA and net income margin of 6.6% and 3.3% compare favorably with KR’s 4.8% and 2%, respectively.

Thus, WMT is a more profitable stock here.

Valuation

In terms of forward non-GAAP P/E ratio, WMT is currently trading at 22.4x, 127.6% more expensive than KR, which is currently trading at 9.84x. WMT is also more expensive in terms of trailing 12-month PEG (0.54x versus 0.16x).

WMT’s price/sales ratio of 0.73x is 265% higher than KR’s 0.2x.

Thus, KR is a more affordable stock here.

POWR Ratings

While WMT is rated “Buy” in our proprietary POWR Ratings system, KR is rated “Neutral”. Here’s how the four components of overall POWR Rating are graded for both these stocks:

KR has an “A” for Industry Rank, “B” for Buy & Hold Grade, and “C” for Trade Grade and Peer Grade. It is currently ranked #9 out of 18 stocks in the Grocery/ Big Box Retailers industry.

WMT has an “A” for Trade Grade and Industry Rank, and “B” for Buy & Hold Grade and Peer Grade. It is ranked #3 in the same industry.

The Winner

While all signs point to KR being the better stock, it should be noted that KR primarily deals with food items, while WMT offers a comprehensive retail structure catering to all kinds of household requirements. With its aggressive pricing strategies and brand loyalty, WMT has consistently ranked in the list of top 10 of the Fortune 500 companies. It has also been labeled as the largest company in terms of revenue for the past six consecutive years.

Given its sheer market dominance, WMT’s growth potential is lower than that of KR as it is already a mature player in the major markets across the country. WMT’s impressive cash flow allows it to finance all investment expenses out of its pocket, thereby branding the company as a cash cow. This also implies lower debt and interest burden, leading to higher profitability. All these parameters combined allowed WMT to generate positive returns over the past three months, despite market volatility, while KR turned negative. Thus, WMT is a better buy here. 

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WMT shares were trading at $142.31 per share on Wednesday afternoon, down $0.47 (-0.33%). Year-to-date, WMT has gained 21.30%, versus a 8.50% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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