Even though Walmart is a significantly larger company than its counterpart and leads the retail pack, competition has heated up in e-commerce. Amazon.com ( AMZN) has been the dominant player in the digital space, but Walmart and Target have smashed serious records in digital sales so far in 2020.
Both big companies are similar and have comparable business models, but which stock is a better buy — Walmart or Target? For investors grappling with this question, here’s a breakdown of how each business has performed to help you see which stock (if not both) may be better suited for your portfolio:
— Walmart stock.
— Target stock.
— The bottom line.
Market capitalization: $394 billion
Dividend yield: 1.6%
Year-to-date (YTD) gain: 17%
Walmart is the world’s largest retailer and has been a bold leader in the retail space since the 1990s. The retail giant serves nearly 265 million customers in more than 11,500 store locations worldwide, with revenues of more than $500 billion annually.
The company’s retail activity in its latest quarter exceeded expectations. Walmart reported total revenue of $137.7 billion, an increase of $7.4 billion, or 5.6% compared with the same time last year. E-commerce sales spiked an impressive 97%, which beat out retail competitor Kroger ( KR), whose online grocery sales grew 92% in the second quarter.
“We believe the company is seeing an outsized benefit from COVID-19 and stimulus checks. Their online offering and delivery options will help it continue to gain market share,” says senior analyst Brian Yarbrough from Edward Jones in Kansas City, Missouri.
Companies that prove to be resilient and outperform expectations during turbulent economic times are the type of businesses investors should look out for. Walmart is not only surviving like other struggling retailers but thriving despite the pandemic.
The flexibility to make large profits while others are tackling financial obstacles shows that Walmart has a strong business model with operational effectiveness. And since the effects of the pandemic appear to remain, the retailer is well-positioned to continuing making steady profits.
Walmart’s retail model caters to being a single point of sale for the bulk of retail purchases, says Johnathan Foster, principal consultant at Proxima Group in Chicago. “Their assortment is broader than Target’s and includes items like tire and lube departments, restaurants and optometry clinics. The key difference between the two is the amount of grocery space in Walmart and their deep footprint in rural America,” he explains.
There is no doubt Walmart has a stable financial platform, but the retailer carries hefty expenses, with total current liabilities at almost $82 billion. Due to the pandemic, the company’s selling, general and administrative expenses were negatively impacted. These incremental costs include labor expenses such as payroll, expanded benefits and bonuses. There were incurred costs from cleaning and sanitation as well. These expenses can be expected for the time being as the health crisis persists.
In Walmart’s investment community call, it was noted that a headwind the company is dealing with is an inventory decline of 4.6%. There are in-stock issues where they are challenged with “higher-than-normal out-of-stocks in some categories” as a result of the pandemic.
Yarbrough also points to inventory shortages as a headwind.
“The surge in sales of essentials such as toilet paper, paper towels and detergent will negatively impact sales in the coming months as consumers utilize the stockpiles in homes and cut back on store trips,” he says.
Market cap: $75 billion
Dividend yield: 1.8%
YTD gain: 17.2%
Target has been experiencing exciting growth in its business this year. The company’s sales rose 24.3% in its second quarter. Target saw a significant uptick in e-commerce activity via a 195% increase in digital sales, according to its financial highlights.
Target’s commitment to improving customer experience both in physical stores and online is paying off. The company’s Shipt service is a same-day delivery option for customers, helping customers to shop with ease and offering enhanced convenience when shopping for groceries, household items and even electronics.
“Target’s focus on continuing their ‘experiential’ mindset with initiatives like store pickups have separated them due to the ease of use of their app and customer service,” Foster says.
The retailer’s dominance in the digital space distinguishes it from its competitors. Target’s management team has made it a priority to adapt to consumer behavior, stating it has “moved quickly to rethink the shopping experience.”
“Target’s digital offering coming out of (the pandemic) puts them on par with Walmart and Amazon. They have done an amazing job creating an experience that consumers can feel safe about and be proud to shop at Target,” says Scott San Emeterio, founder and CEO of BallStreet Trading in New York City.
Consumers have become accustomed to the value that its store pickups bring and any investment into making this more viable is paramount to future success, Foster adds.
A downside to Target is that there is a limited grocery section, and that operation requires more development. Target shoppers may not think of shopping for groceries at its stores before its competitors. TGT has a more prevailing presence in clothing and accessories, which is its stronger suit — but the company could focus its expansion in groceries to be a more powerful consumer staple, experts say.
Overall, there is optimism surrounding Target’s position and few things limiting its growth. “After a blowout second-quarter earnings announcement, I believe there is still upside because Target is so well-positioned in this new normal,” San Emeterio says.
Walmart and Target are leaders in the retail space with tailwinds supporting their business going forward.
They’ve proven to have durable business models that are not threatened by the pandemic economy. While they may not be on the same level, rather than viewing them as competitors, ultimately, both are winners in their own right.
Both retail giants have strong balance sheets, are expanding their business and are willing to adapt to evolving consumer behaviors. This combination of business practices amounts to a winning formula in the changing retail landscape.
“Consumers have become accustomed to the value that store pickup brings and any investment into making this more viable is paramount to future success,” Foster says. “Regardless of if an effective medical cure is found for COVID-19, the proverbial dye has been cast that will influence retailer experiences for the foreseeable future.”
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