Target stock (NYSE: TGT), the second-largest discount chain in the U.S., has grown by close to 80% since early February 2020 after the WHO declared the Coronavirus a global health emergency, while Walmart’s stock (NYSE: WMT), the world’s largest retailer, operating discount stores, supercenters, neighborhood markets, and Sam’s Club warehouses, has gained about 20% of its value. Both big-box retailers benefited from consumers spending more of their disposable cash on food and essentials rather than on vacations or dining out. But how is Target’s stock priced compared to Walmart’s stock? Target’s P/S multiple of 1.1x sits well over the figure of 0.9x for rival Walmart. While Target’s stock appears overvalued compared to Walmart’s stock given the notable mismatch in their current P/S multiples, we still believe it is a better pick between both of the companies. This is based on comparing the revenue growth and operating margins for the two companies over recent years. Target’s premium valuation should not keep you away from investing in this high-performing stock, which has demonstrated growth in revenues along with raising its profit margins. Our dashboard Target vs. Walmart details the full picture based on revenue growth and operating margin – parts of which are summarized below.
1. Revenue Growth
While Walmart’s U.S. operations still generate almost 5x more revenues than Target, the latter’s revenue growth was higher in 2020 (20% vs 9% for WMT). Throughout the pandemic, Target outdid Walmart in comparable sales and revenue growth. (We have compared Walmart U.S and Sam’s Club revenues together as a whole for comparison with Target’s revenues since Target operates only in the U.S. market)
- Target’s comparable sales of 19.3% managed to surpass Walmart’s U.S. comp sales of 8.7% in 2020 (year Jan ending for both companies). For comparison, comparable sales growth was recorded at 3.4% for Target and 2.9% for Walmart in 2019. A similar growth trend was witnessed in 2018, where Target’s comps grew 5.0%, while Walmart’s comps grew 3.7%.
- Of course, the odds of either retailer sustaining their recent levels of growth, post-Covid, are slim. But both multi-line retailers have shown that brick-and-mortar stores have a place in the future of retail, and it’s leveraging that position to add more convenient online alternatives. The retailers invested heavily in same-day fulfillment service while leveraging their brick-and-mortar stores.
2. Operating Income
- Target’s operating margin came in at 6.9% in 2020, slightly higher than Walmart’s U.S operating margin which stood at 4.8%.
- In 2020, the operating margin for Target changed by 1 pp (percentage points) – better than the change of only 0.09 pp for Walmart. In fact, a similar trend was seen a year ago where the operating margin for Target changed 0.5 pp compared to Walmart’s -0.1 pp growth.
- Brick-and-mortar retailers tend to squeeze their own margins when they expand online aggressively – with inflated fulfillment costs and promotions. But Target’s operating margins have gradually expanded despite a spike in online orders (digital comps growing 145% year-over-year in 2020). Much of the expansion came from the popularity of Target’s same-day delivery and wider assortment of consumer discretionary products like home furnishings.
- The expansion in Target’s operating margins was brought about by a decline of 100 basis points in selling, general, and administrative margins (SG&A as % of sales) from 20.9% in 2018 to 19.9% in 2020. On the other hand, Walmart’s SG&A margins remained flat at 20.8% during this period.
In summary, the net advantage moves back to Target based on its higher revenue growth and better operating income growth in the current scenario as compared to Walmart. While Target looks overvalued right now, its shares are trading at twenty-one times estimated FY 2022 earnings, and Walmart’s are at twenty-four times projected earnings. All this, supports our argument to pick Target over Walmart.
E-commerce is eating into retail sales, but this might be an investment opportunity. See our theme on E-commerce Stocks for a diverse list of companies that stand to benefit from the big shift.