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Better Buy After Earnings: Target (TGT) Vs. Walmart (WMT) Stock

Shares of Target TGT dropped 13% Wednesday after the company was unable to beat expectations like Walmart WMT did the day before. Earnings from the two big retailers showed different pictures of how the challenging economic environment is affecting the two companies. Target’s dismal report highlighted a common narrative on the overall behavior of consumer spending.

Target and Walmart’s Q3 reports support the narrative that consumers are cutting back on spending and seeking savings. Target CEO Brian Cornell said that shopping behavior later in the quarter was impacted by inflation, rising interest rates, and economic uncertainty.

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Zacks Investment Research


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Q3 & Consumer Spending

Target is widely considered among consumers shopping for mid-level to quality and premium goods across a wide range of consumer products. Target relies more on larger ticket/discretionary spending than Walmart, with TGT's emphasis on higher-end home décor, food, clothing, and electronics. Some of the higher-end products come through Target’s partnerships with Apple AAPL, Disney DIS, Levi’s LEVI, and Ulta Beauty ULTA.  

Target stores also cater to their audience with premium amenities, including in-shop Starbucks SBUX at many locations. Common and popular consumer household products, food, and groceries are sold in both retail chains. However, Walmart seeks to provide products that can meet price guarantees, unlike many premium retail items and brands.

Walmart’s beat on both its top and bottom line during Q3 is a clear and somewhat expected indication that consumer demand is higher for Walmart’s lower price offerings. WMT beat EPS expectations by 13% at $1.50 and 3% on the top line, with sales at $152.81 billion up 8.7% YoY.

Target’s miss on its bottom line points to middle-class and higher-paying customers fading and looking for cheaper savings. TGT missed EPS expectations by 28% at $1.54 per share but revenue slightly topped expectations at 26.51 billion. This is an indication that the operating environment is tougher on Target in addition to not getting a push from its customer base.

Even though Target’s decisive inventory actions taken earlier in the year have the company more prepared for this holiday season, manament anticipates a single-digit sales decline. Walmart also said it improved on inventory levels during Q3 but is cautious of the holiday season as well.

Growth & Outlook

For TGT’s current fiscal year, earnings are now forecasted to drop -40% at $8.07 per share, with sales up 3% to $109.77 billion. Earnings are expected to stabilize and climb 49% in FY24 at $12.01 per share. Top line growth is also expected with FY24 sales projected to be up 3% to $113.78 billion.

Turning to WMT’s current fiscal year, earnings are projected to decline -7% at $5.99 per share, with sales up 5% to $605.08 billion. FY24 earnings are expected to rise 8% with sales up 3% at $623.83 billion.

Over the last five years, TGT has grown at a 23% growth rate. This outpaces WMT’s 8% and the S&P 500’s 13% growth rate.

Performance & Valuation

Over the last year, Walmart shares have acted somewhat defensive and recouped losses from earlier in the year. After their Q3 reports, WMT is now up +2% YTD to outperform TGT’s -29% and the benchmark. However, over the last decade, TGT’s total return has still beaten WMT.

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Zacks Investment Research


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After the large drop following its Q3 release, TGT trades at a 19.2X forward earnings multiple and further below its decade-high of 26.8X. In comparison, WMT now trades at a 25.4X forward earnings multiple, solidly below its decade-high of 28.1X.

From a valuation standpoint, Target continues to look more attractive relative to Walmart and this would be expected after Wednesday’s decline. However, Target’s expected return to growth in its FY24 is even more critical as the company expects sales to be slightly down in Q4.

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Zacks Investment Research


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Dividends

Both stocks have strong dividends, having increased them in each of the last five years. However, the TGT dividend trumps WMT. TGT offers investors a 2.78% annual dividend yield at $4.32 per share, which is considerably higher than WMT’s 1.51% at $2.24 per share.

WMT’s annual dividend yield is on par with its Retail Supermarkets Industry average of 1.62% but TGT’s dividend is above its Retail-Discount Stores Industry average of 1.04%.

Bottom Line

Both TGT and WMT still land a Zacks Rank #3 (Hold). The two omnichannel retailers have an important significance to American society, making them solid long-term investments despite economic uncertainty. The innovation of both companies still rectifies this with Target’s one-stop in-shop approach and Walmart’s push into healthcare.

Considering which stock to add to the portfolio still centers around investors’ risk tolerance and time horizon. Short term, WMT stock may continue to be less volatile than TGT and this has been especially true over the last year. However, TGT’s growth and dividend have trumped WMT and Target remains more attractive from a valuation standpoint.



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Walmart Inc. (WMT) : Free Stock Analysis Report
 
Apple Inc. (AAPL) : Free Stock Analysis Report
 
Target Corporation (TGT) : Free Stock Analysis Report
 
Starbucks Corporation (SBUX) : Free Stock Analysis Report
 
The Walt Disney Company (DIS) : Free Stock Analysis Report
 
Ulta Beauty Inc. (ULTA) : Free Stock Analysis Report
 
Levi Strauss & Co. (LEVI) : Free Stock Analysis Report
 
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