TL;DR
- Costco has the strongest moat
- Target leads in terms of revenue growth
- Target leads historical stock performance
- Target leads in terms of valuation and key financial metrics
- Overall Target is the best pick, given where valuations are today. However, at a more attractive valuation, I would prefer Costco (over Walmart) for a more defensive pick.
In the interest of hedging against a heavy exposure of technology stocks, I've been looking into some Consumer Staples. So, I wanted to look closer at Walmart vs. Costco vs. Target. Which one (or two) would I own?
First, I gotta admit it's pretty boring looking at these "boomer stocks"... but, honestly it makes you SO much better as an investor (and entrepreneur) the more you understand the business model of these companies that we're also customers of. We've all shopped at one of these stores. But, that being said... I'll try to make this quick and painless as possible.
I'm going to score each of Walmart, Costco, and Target a rank of 1 to 3 for each category I believe is important for this sector.
Moat
We all have a pretty good idea of what differentiates Walmart , Costco, and Target. But, it's worthwhile identifying their respective moats. Walmart has a clear advantage in its supply chain efficiency. It was able to scale so large, only because of these efficiencies. This scale also gave them another moat – massive purchasing power. They're now able to negotiate much better prices and lower costs because of this. Ultimately they pass on the cost-savings to customers, attracting the "people of Walmart" 😂 This isn't something that can be easily taken away from them. Costco needs no introduction either. As the third-largest retailer in the world, it has a lot of brand recognition with its member-only warehouses. Because of their unique model, and ability to profit from membership fees, they're able to offer goods at prices lower than Walmart. In fact, the bring in $3.5bn from their 60m paying members each year – which represents 88% of their bottom line. 90% of their members are recurring; so there is proven stickiness and high switching costs. The membership fees and bulk purchasing make up for any lost margins. There is no true competitor to Costco. Target, arguably has the weakest economic moat. Some, in fact, argue it doesn't have one. However, Target has (in my eyes) undergone a very successful turnaround story by focusing on its smaller urban stores and own brands. They've focused a lot on branding, and marketing to younger demographics – which makes their recent partnership with Ulta make so much sense. Their moat, for me, is their own brands – which made up one third sales in 2020! This is (part of) why they enjoy the highest margins of this group.
Ranking: (1) Costco; (2) Walmart; (3) Target
Revenue Growth
First, let's recognize this a slow-growth industry. That'll make things easier to digest. Below you'll see historical growth for each of them have been in the single digits, with the exception of the pandemic – which gave both Costco and Target a much higher boost (% wise). Note: Costco's fiscal year-end (August) doesn't account for the full calendar year, which skews some of the data. Based on what we see so far, I would label Target as the biggest pandemic winner among the three.
| millions | WMT | COST | TGT |
| Actuals | Revenue | ||
| 2018 | 514,405 | 141,576 | 75,356 |
| 2019 | 523,964 | 152,703 | 78,112 |
| YoY% | 8% | 4% | 4% |
| 2020 | 559,151 | 166,761 | 93,561 |
| YoY% | 7% | 9% | 20% |
| Estimates | |||
| Q1 2021A | 138,310 | 44,769 | 24,179 |
| % YoY | 3% | 15% | 25% |
| Q2 2021A | 141,048 | 45,277 | 25,160 |
| % YoY | 2% | 21% | 11% |
| Q3 2021E | 134,000 | 60,370 | 23,480 |
| % YoY | 0% | 13% | 4% |
| Q4 2021E | 148,420 | 46,160 | 29,190 |
| % YoY | -2% | 7% | 3% |
| 2021 | 561,778 | 196,576 | 102,009 |
| YoY% | 0% | 18% | 9% |
| 2022 | 574,930 | 207,100 | 104,400 |
| YoY% | 2% | 5% | 2% |
| 2023 | 594,100 | 223,000 | 105,400 |
| YoY% | 3% | 8% | 1% |
| 2024 | 616,500 | 241,900 | 109,400 |
| YoY% | 4% | 8% | 4% |
It appears analysts are most bullish on Costco, and could be underrating Target. I can understand why... However, I never have a problem with being conservative (i.e. Target); but I am always cautious about optimism (i.e. Costco).
It would take a lot to move Walmart revenues because of how large they are, but I do believe they are positioning themselves to be the leader in technology through partnerships with Instacart, Shopify, Google, etc.
I'm also interested to see how Amazon plays the physical retail space and which area they'll focus on. Grocery delivery is the obvious path, but a member-only warehouse would be an interesting play!
Revenue per square feet is a really important metric for retail businesses, because it gives an indication of the optimization of their physical space. Costco is a clear winner here because of their bulk purchasing. However, it's interesting to note how quickly Target is catchup to Walmart – partly due to its focus on smaller footprint urban shops.
| WMT | COST | TGT | |
| Actuals | Revenue per Sq Ft | ||
| 2018 | $456 | $1,279 | $314 |
| 2019 | $464 | $1,341 | $326 |
| YoY% | 5% | 4% | 4% |
| 2020 | $499 | $1,436 | $388 |
| YoY% | 7% | 7% | 19% |
| Q1 2021A | $130 | $386 | $100 |
| Q2 2021A | $133 | $390 | $104 |
Ranking: (1) Target; (2) Costco; (3) Walmart
Historical Stock Performance
Target had a healthy pullback after their last earnings report due to growth concerns. From a technical perspective it's questionable whether this is a good entry point, since we might experience lower prices. I personally expect the same to happen to Costco after earnings are reported on Sep 23, 2021. The markets will have a hard time digesting slower growth post-COVID for any pandemic beneficiary imo. Walmart stock has had a pretty disappointing performance recently. However, as we know, past performance doesn't indicate future results – but it helps identify momentum.
Ranking: (1) Target; (2) Costco; (3) Walmart
Key Financial Ratios
I've compiled a table of some of the key metrics that are worth measuring for retail businesses in this sector. Target has the highest return on invested capital, but has high exposure to debt right now. After its recent pullback, I would say Target is the most attractively valued. But, keep in mind there is an attached risk to Target's valuation because it has more "proving" to do versus the others. It should, by nature, have a discounted valuation. The more appropriate question is whether it is discounted enough?
| WMT | COST | TGT | |
| Shareholder Return | |||
| ROIC | 7.98% | 13.21% | 15.35% |
| Debt/Equity | 0.78 | 0.56 | 1.05 |
| Valuation | |||
| P/E | 42.66 | 43.14 | 20.18 |
| PEG | 17.06 | 5.26 | 3.01 |
| PEG (5-year fwd) | 3.11 | 3.86 | 1.67 |
| P/FCF | 24.04 | 29.49 | 20.39 |
| P/TBV | 8.26 | 12.31 | 8.44 |
| Buyback Yield | 1.67% | 0.22% | 2.30% |
| Dividend Yield | 1.45% | 0.69% | 1.42% |
Ranking: (1) Target; (2) Costco; (3) Walmart
Price Target
The most important part, in addition to the context above, is to determine our price targets for each of the companies. There isn't anything revolutionary that either of Walmart, Costco, or Target will do to drastically change its earnings. You can argue Walmart is ahead in technological adaption and deserves a premium. Walmart has had a decent run since the drop from its Q1 earnings report, which I was able to capture most of. But, it maybe time to get out of this swing trade, in exchange for Target.
| WMT | COST | TGT | |
| Price Target | |||
| Current Price | $151.45 | $458.99 | $253.40 |
| Intrinsic Value (DCF) | $152.25 | $400.71 | $310.94 |
| Historic P/FCF | 17.00 | 27.57 | 12.75 |
| 2026 P/FCF normalized | $118.10 | $397.14 | $130.85 |
| PRICE TARGET | $145.42 | $400.00 | $274.92 |
| Upside Vs. Current | -3.98% | -12.85% | 8.49% |
Ranking: (1) Target; (2) Walmart; (3) Costco
Conclusion
From the three consumer defensive stocks, at this point, an entry into Target is justified, in my opinion. It recently dropped on earnings report, which I think is going to be the case for many pandemic beneficiaries. This is the exact same swing trade I played with WMT – but, I think the opportunity with TGT is much greater, because of its higher growth. But, of course, Target is higher risk because it has to do more proving of its new strategy. I am curious to see how well its own brand sales hold up – because if 36% of their sales are coming from their own brands, their going to be a long-term winner... but especially during back-to-school and holiday season. The small entry into Target makes sense for me, but keep in mind the risks ahead with the Fed meetings before year-end.
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