Target Vs. Walmart Stock: Which Is The Better Buy? (2024)

Introduction:

Target Corporation (NYSE:TGT) and Walmart Inc. (NYSE:WMT) are both retail giants with more than 12,000 stores between them. Both reported Q1 2022 results during the third week of May (TGT on May 18, WMT on May 17), and both reported similar results: earnings fell far short of projections.

In the days since their earnings announcements, both stocks have gone down in price Target (-31%) significantly more than Walmart (-18%).

In addition, both companies have considerable e-commerce sales with Walmart ranked second (behind only Amazon (AMZN)) and Target ranked sixth.

Since the earnings announcements, Seeking Alpha contributors have rated Target better than Walmart with two Buy ratings and six Holds compared to WMT's five Hold ratings. Noticeably neither has any Sell ratings even after the poor Q1 showing.

In this article, I will examine what the differences are between the companies and which one is potentially the better investment option including dividends and capital gains.

Target And Walmart's Valuation Compared To Their Financial Metrics

When you look closely at the financial metrics comparing the two companies it looks like TGT is the winner.

The first point that jumps out at you is how much bigger WMT is than TGT with five times more revenue.

This is because Walmart has more than 10,000 stores worldwide and Target a little less than 2,000 at 1,926. And about one-half of Walmart stores are overseas.

The other curious point is how close they are in revenue per store with both Target and Walmart averaging about $54 million. So revenue-wise they are virtually identical on a per-store basis.

I was surprised that the GM (Gross Margin) percentage (Line 4) for Target was 3% points higher than Walmart.

For the most recent quarter, Target's GM was an admitted big problem:

First quarter operating income margin rate was 5.3 percent in 2022, compared with 9.8 percent in 2021. First quarter gross margin rate was 25.7 percent, compared with 30.0 percent in 2021. This year's gross margin rate reflected higher markdown rates, driven largely by inventory impairments and actions taken to address lower-than-expected sales in discretionary categories, as well as costs related to freight, supply chain disruptions, and increased compensation and headcount in our distribution centers. Source: Target Press Release

Ditto for Walmart who explained the usual litany of problems affecting their GM:

First-quarter gross margin rate decreased 89 basis points versus last year, due in part to pressure at Sam's Club from supply chain costs, fuel mix, inflation of markdowns caused by inventory delays. Walmart U.S. gross margin rate was down 38 basis points with more than 3/4 of the decline related to higher-than-expected supply chain, fuel, and e-commerce fulfillment costs. Source: Earnings Announcement

And although Target's GM% (Line 4) is higher than WMT's 28% to 25%, Walmart's GM % to EV (Enterprise Value) is actually 3 points higher than Target's, 40% to 37%.

So overall, gross margin numbers are relatively equal.

Two more important metrics are PE Ratio (Line 10) and Price to FCF (Free Cash Flow) shown on Line 15. In both cases, TGT looks much more reasonably priced than WMT, especially on the FCF ratio.

Both of those items make me wonder if it's WMT that's overvalued and TGT being undervalued, rather than vice versa.

And if we look at earnings per share over the last six years, Target also seems much better than Walmart, up 131% versus Walmart's 34%.

Is Target Or Walmart Stock Better For Dividends?

Looking at the current rate of dividends, Target's yield of 2.1% is marginally better than Walmart's 1.8%.

In addition, both companies are Dividend Aristocrats having paid a dividend for at least 25 years.

Per Target CFO Michael Fiddelke:

Regarding the dividend, later this year, we plan to recommend that our Board approve a per-share dividend increase in the 20% to 30% range, as we continue to move toward a 40% payout ratio over time. In addition, given our current cash position and expectations for strong cash flow, we believe our 2022 share repurchases will be at or above the $7 billion we accomplished in 2021. Source: Earnings Call Transcript

So for Target, a dividend increase of 20-30% and more share buybacks to the tune of $7 billion.

Walmart increased its dividend by $.05 and announced another $10 billion in share repurchases:

We increased share repurchases significantly this year with buybacks of just under $10 billion, a pace we plan to continue or increase in the coming year given our view of the long-term value of the company. Source: Earnings call transcript.

Considering the larger dividend boost and larger share repurchase commitment as a percentage of market value, I rate Target the winner in the dividend and share repurchase categories.

Is TGT Or WMT Stock The Better Buy?

Target and Walmart have much in common even to the point of having virtually identical sales per store. Both have done a good job improving their business prospects over the last several years.

But Walmart, with five times the revenue and five times the number of stores, seems to me to be the more vulnerable to the possibility of a worldwide recession because of their exposure to the vagaries of non-US locations.

Target, on the other hand, has all of its stores in the US.

Potential political/social problems in the above table as indicated by the orange arrows include about 3,500 stores. That is a lot of potential problems not even counting the current inflation, logistics, and Ukraine problems both are facing at the moment.

In addition, I rate Target better than Walmart on financial metrics.

Based upon the above points I rate Target a buy and Walmart a Hold.