4 Reasons You Should Forget Target and Buy Walmart Instead

target (TGT 0.57%) We recently published our latest earnings report. Sales for the first quarter of fiscal 2024, which ended May 4, were down 3% year-over-year to $24.53 billion, but still roughly in line with analysts’ expectations. Comparable-store sales fell nearly 4%, marking the fourth straight quarter of declines.

Bottom line, adjusted earnings per share (EPS) fell 1% to $2.03, missing consensus forecasts by $0.02. Target’s stock price tumbled after the disappointing report. It has continued a decline of 36% over the past three years. walmart‘S (WMT 0.83%) During the same period, the stock price rose 37%. Let’s review four reasons why Walmart beats Target by a wide margin.

Image source: Walmart.

1. Excellent scale and diversification

Target operated 1,963 stores at the end of the first quarter, all of which were located in the United States. Walmart is a larger and more diversified retailer, operating 10,607 stores and numerous e-commerce sites in 19 countries. In the U.S. market, it operates 4,609 Walmart stores and 599 Sam’s Club stores.

Walmart’s international division owns Flipkart, one of India’s largest e-commerce marketplaces and a major stake in the Chinese e-commerce giant. JD.com. Sam’s Club business competes with: costco in a member-driven warehouse club space.

This scale and diversification makes Walmart a safer long-term retailer than Target, which relies heavily on the U.S. market. Both companies protested Amazon Although it has converted its own brick-and-mortar stores into fulfillment centers for online orders, Walmart has a much larger store network than Target.

2. Better component growth

Target’s component fell 4% in fiscal 2023 (ending January 2024) as it struggled with inflationary headwinds on consumer spending and theft and safety concerns. This has led to the closure of some small stores. The company also faced a boycott by conservative groups over some controversial products from its Pride Month collection.

Target generates a lower percentage of its sales from grocery stores, which is more resilient to macro headwinds than Walmart. In the most recent fiscal year, groceries accounted for 23% of Target’s sales and 60% of Walmart’s U.S. sales.

Walmart has also faced inflation headwinds, theft-related issues and political boycotts over the past year, but has performed much better than Target. In fiscal 2024 (which ended in January of this year), Walmart’s U.S. prices (excluding fuel) rose nearly 6%. Sam’s Club recorded comp growth of nearly 5% on a like-for-like basis, with international sales up 11% on a constant currency basis. The company’s total revenue increased 6% for the full year.

Target expects its stock price to rise only 0 to 2 percent in fiscal 2024. Walmart expects consolidated net sales to be “at or slightly above” its original forecast of 3 to 4 percent growth in fiscal 2025.

3. Excellent performance growth

As Target’s growth cools, it is limiting price cuts and cutting costs to boost EPS. However, despite these efforts, this year’s adjusted EPS growth rate is expected to be only in the mid-2% range. Walmart, which is rationalizing spending to counter macro headwinds, expects split-adjusted EPS to rise mid-4% this year.

4. Deserves higher praise

Based on these estimates, Target may seem like a cheaper play at 16 times this year’s revenue. Walmart trades at 28 times forward earnings. Target’s forward dividend yield is 3.1%, which is higher than Walmart’s 1.3% yield.

But Walmart deserves a higher valuation because it’s becoming more diverse, has increasing competition, and is generating strong revenue growth. Walmart’s U.S. growth also suggests Target is experiencing challenges unique to the company.

Walmart is likely to come out ahead of Target.

Both Walmart and Target have survived the retail apocalypse that decimated many of their brick-and-mortar peers over the past 14 years. They have also grown amid the COVID-19 pandemic by keeping stores open and selling more products online.

But today, Target is increasingly falling behind Walmart in the U.S. market. It doesn’t sell enough groceries to offset inflation headwinds, and it’s exposed to the fast-growing overseas e-commerce and warehouse club markets. Therefore, I believe Walmart will continue to significantly outperform Target for the foreseeable future.