Stock Market: Discount Giants Walmart and Target Take Opposite Directions

It’s strictly a personal perception, but I always found Walmart stores to be somewhat unpleasant. The lighting struck me as harsh, the staff seemed vague in their directions, some shelves were in disarray, and the whole process of filling the shopping cart was exhausting.

Target, a major Walmart competitor in the U.S., was something else again. Although both promote themselves as discount merchandisers, I found Target stores to be more upscale. Lighting was softer, there were mini-boutiques for cosmetics and clothing, the staff seemed more knowledgeable, things were where you expected them to be – in short, Target seemed cool.

Well, that shows how little I know about merchandising. In these stressful times of inflation and rising interest rates, Walmart is crushing Target at the place where it really counts: the cash register.

Second quarter results show how customers feel about the two chains. Walmart is enjoying a very successful year and the stock recently touched an all-time high. Target, by contrast, has seen a drop in sales, although profits are holding up. Its stock has been trending down for most of this year and is currently trading near its 52-week low. Here’s a closer look at both companies.

 

Target Inc. (TGT-N)

 

Background: Target is a Minneapolis-based operator of big box stores, with almost 1,900 outlets in all 50 states and the District of Columbia. The company opened its first store in 1962 and now employs 350,000 people. It attempted to establish a presence in Canada a few years ago but the initiative failed miserably, and the company pulled out after incurring heavy losses.

Performance: The stock has been trending down since January and on Friday touched a 12-month low of $112.54 (figures in U.S. dollars). It finished the day a few cents higher.

Recent developments: Target reported mixed second quarter results and lowered its full-year guidance, pushing down investor confidence even more. Sales in the quarter were down 4.9 per cent compared to a year ago, at $24.4 billion. 

However, a big improvement in operating margin helped to boost profit by 365 per cent to $835 million ($1.80 per diluted share). That compared to $183 million ($0.39 a share) in the same period a year ago.

Dividend and buybacks: Target increased its quarterly dividend by 1.9 per cent to $1.10 per share ($4.40 per year) effective with the August payment. The stock yields 3.9 per cent. The company did not repurchase any stock in the second quarter.

Outlook: Target now expects comparable sales to decline by mid-single digits for the remainder of the year. Adjusted earnings per share are projected to be in the $7-8.00 range, compared with the prior range of $7.75-$8.75.

 

Walmart (WMT-N)

 

Background: Walmart is the world’s largest bricks and mortar retailer with more than 10,500 stores in 19 countries, plus an expanding e-commerce operation. It employs some 2.3 million people worldwide and had revenue in the 2023 fiscal year of $611 billion.

Performance: While Target struggles, Walmart shares recently touched an all-time high of $165.85 and are currently trading a couple of dollars below that. 

Recent developments: Second quarter 2024 results (to July 31) were very positive. Revenue was $161.6 billion, up 5.7 per cent from $152.9 billion the year before. eCommerce growth was strong, up 24 per cent globally year-over-year. Operating income was $7.3 billion, ahead 6.7 per cent from a year ago. 

Net income attributed to shareholders was $7.9 billion ($2.52 per diluted share). That was 53 per cent better than 12 months before, which saw profits of $5.1 billion ($1.88 per share). For the first six months of the 2024 fiscal year, Walmart made a profit of $9.6 billion ($3.54 a share), up 35.6 per cent on a per share basis from the prior year. 

Dividend and buybacks: The quarterly dividend is $0.57 a share ($2.28 annually), to yield 1.4 per cent at the current price. The company has repurchased eight million shares year to date at a cost of $1.2 billion.

Outlook: The company believes growth will continue for the rest of the fiscal year. Net sales are expected to increase 4.0 per cent to 4.5 per cent compared to fiscal 2023. Adjusted earnings per share from are expected to be $6.36- $6.46. 

“We’re in good shape with inventory, and we like our position for the back half of the year,” said CEO Doug McMillon. 

So, what does it all mean for investors? At first glance, Target seems to be trading at a bargain price. It offers a higher yield and the stock’s p/e ratio is 15.45, while Walmart’s is more than double that, at 31.22.

But this looks like a value trap to me. Walmart has momentum running in its favour, which is a huge plus in today’s markets. Its strong focus on rollbacks and rock-bottom pricing over the years has paid off with rising sales as many shoppers count every penny in their personal battles against inflation. Target’s sales are going in the opposite direction.

The stock charts tell a similar story. Target’s shares hav e been in a downtrend since the end of January, with no sign of a turnaround. Walmart stock has been moving higher since June 2022.

My Internet Wealth Builder newsletter rates Walmart as a buy at current levels. We do not advise new purchases of Target at this time.

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca/subscribe

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