Walmart Inc. (WMT) and Target Corporation (TGT), two of the prominent players in the US retail industry, have been thriving amid the pandemic because of the resilient consumer spending on essentials and their strong online presence. The National Retail Federation expects retail sales to increase between 3.6% and 5.2% year-over-year during the holiday season.

Both the stocks generated decent returns over the past five years. While WMT returned 158% over this period, TGT gained 145.3%. In terms of year-to-date performance, TGT is a clear winner with 37.6% returns versus WMT’s 26.7%. But which of these stocks is a better pick now? Let’s find out.     

Business Structure and Latest Movements  

WMT is a discount store and supermarket major that operates more than 11,500 retail and wholesale units in 27 countries worldwide, selling grocery and a variety of general merchandise items to over 256 million customers per week. It also serves its customers through its eCommerce website. The company operates in three segments – Walmart U.S., Walmart International, and Sam’s Club.

WMT has recently announced its continued expansion of full suite Pet offerings with the launch of Walmart Pet Care, an omnichannel pet care offering. The company also rolled out its Walmart+ membership program in the last quarter, through which members will receive free delivery services, fuel discounts, and a host of other benefits. It also partnered with Quest Diagnostics and DroneUp, a nationwide drone services provider, to deliver select grocery and household essentials, and to test delivery of certain health and wellness products.  

TGT operates as a general merchandise retailer in the United States and Canada, offering a selection of merchandise, including consumables, seasonal, home products, and apparel. It sells its products through nearly 1,900 stores as well as through its digital channel. The company operates five core merchandise categories, all of which have witnessed strong market-share gains this year.

TGT announced a strategic long-term partnership to transform the beauty landscape with Ulta Beauty (ULTA), the largest US beauty retailer, last month. The “shop-in-shop” concept will offer established and emerging prestige brands online and in select Target locations nationwide beginning next year. TGT has also been investing in fulfillment centers such as Drive Up and Shipt which has bolstered its ability to make same-day deliveries. Additionally, the company is involved in opening small-scale stores in underserved areas to tap into an unsaturated market in both physical stores and e-commerce.

Recent Financial Results

In the third quarter ended September 2020, WMT’s total revenue climbed 5.2% year-over-year to $134.7 billion. US e-commerce sales surged 79% while international sales increased 1.3% year-over-year. EPS for the quarter came in at $1.80, rising 56.5% compared to the year-ago value.

TGT’s top-line for the quarter ended September 2020 grew 21.3% year-over-year to $22.3 billion. Digital comparable sales and same-day services grew 155% and 217%, respectively, compared to the year-ago quarter. Adjusted EPS came in at $2.79, rising 105.1% year-over-year.

Here TGT is in an advantageous position.

Past and Expected Financial Performance

WMT’s revenue and EPS grew at a CAGR of 3.5% and 22.5%, respectively, over the past 3 years. Also, the CAGR of the company’s free cash flow has been 11.7%.

The market expects the company’s revenue to increase by 4.3% in the current quarter and 5.9% in the current year. WMT’s EPS is expected to grow 8% in the current quarter, 13.2% in the current year, and 3.2% next year. Moreover, its EPS is expected to grow at a rate of 6.8% per annum over the next five years.

On the other hand, TGT’s revenue and EPS grew at a CAGR of 13.9% and 17.6%, respectively, over the past 3 years. The CAGR of the company’s free cash flow has been 10.1%.

The market expects TGT’s revenue to increase by 13.9% in the current quarter and 17.6% in the current year. The company’s EPS is expected to grow 33.7% in the current quarter and 41.6% in the current year, but decline 6.5% next year. However, TGT’s EPS is expected to grow at a rate of 13.1% per annum over the next five years.

WMT has an edge over TGT here.

Profitability      

WMT’s trailing-12-month revenue is more than six times of what TGT generates. But TGT is the more profitable with a gross profit margin of 29.2% versus WMT’s 24.8%.

Moreover, TGT’s ROE and ROA of 30.7% and 7.9% compare favorably with WMT’s 24.1% and 5.9%, respectively.

Valuation

In terms of forward P/E, WMT is currently trading at 22.05x, 11% more expensive than TGT which is currently trading at 19.85x. Though WMT is less expensive in terms of trailing-12-month P/S (0.79x versus 1.01x), its forward PEG of 3.96x is 130% higher than TGT’s 1.72x.

In terms of trailing-12-month price/cash flow as well, WMT’s 12.87x is 43.6% higher than TGT’s 8.96x.

Though WMT looks much more expensive compared to TGT, it’s worth paying this premium considering WMT’s significantly higher earnings growth potential.

POWR Ratings

Both WMT and TGT are rated “Strong Buy” in our proprietary POWR Ratings system. Here are how the four components of overall POWR Rating are graded for WMT and TGT:

AMZN has an “A” for Trade Grade, Buy & Hold Grade, and Industry Rank, and a “B” for Peer Grade. In the 18-stock Grocery/Big Box Retailers industry, it is ranked #1.

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

The Winner

While both WMT and TGT are good long-term investments considering their strong balance sheets, expansion strategies, and huge customer base, WMT appears to be a better buy based on the factors discussed here.

While TGT is a relatively cheaper option to bet on the immense growth potential of the drive-up online grocery markets, WMT is a proven winner due to its large scale of operation and efficient supply chain, and hence, its premium valuation is justified.

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WMT shares were trading at $148.81 per share on Thursday afternoon, down $1.71 (-1.14%). Year-to-date, WMT has gained 26.85%, versus a 15.68% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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