If I had to choose my least favourite shopping experience, it would be going to Walmart. The lighting strikes me as harsh, the staff seemed vague in their directions, some shelves are in disarray and the whole process of filling the shopping cart can be exhausting.
Target, a major Walmart competitor in the United States, is something else again. Although both promote themselves as discount merchandisers, I find Target stores to be more upscale. Lighting is softer, there are mini-boutiques for cosmetics and clothing, the staff seem more knowledgeable, things are where you expect them to be – in short, Target seems 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.
Background: Target is a Minneapolis, Minn.-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 US$112.54. 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 with a year ago, at US$24.4-billion.
However, a big improvement in operating margin helped to boost profit by 365 per cent to US$835-million (US$1.80 per diluted share). That compared to US$183-million or 39 US cents in the same period a year ago.
Dividend and buybacks: Target increased its quarterly dividend by 1.9 per cent to US$1.10 per share, 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 for the fiscal year are projected to be in the US$7-$8 range, compared with the previously forecast range of US$7.75-$8.75.
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 and had revenue in the 2023 fiscal year of US$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 US$161.6-billion, up 5.7 per cent from US$152.9-billion the year before. eCommerce growth was strong, up 24 per cent over the same period. Operating income was US$7.3-billion, ahead 6.7 per cent from a year ago.
Net income was US$7.9-billion (US$2.52 per diluted share). That was 53 per cent better than 12 months before, which saw profit of US$5.1-billion (US$1.88). For the first six months of the 2024 fiscal year, Walmart made a profit of US$9.6-billion (US$3.54), up 35.6 per cent from the prior year.
Dividend and buybacks: The quarterly dividend is 57 US cents a share, to yield 1.4 per cent at the current price. The company has repurchased eight million shares year-to-date at a cost of US$1.2-billion.
Outlook: Walmart believes growth will continue for the rest of the fiscal year. Sales are expected to increase between 4 per cent and 4.5 per cent compared with fiscal 2023. Adjusted earnings per share are expected to be US$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 special promotions 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 have 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.
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