TGT vs. WMT: Discount Stores Report Card

Grading Target and Walmart on financials, valuation and more

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TGT vs. WMT: Discount Stores Report Card

Financials

The numbers are in, and they aren’t pretty for either retailer.

Target announced Q3 earnings Thursday, and the obvious blemish in its press release is the 46% drop in net earnings — down to $341 million on $17.3 billion in revenue. The quarter looks a little better if you back out the Canadian business, with a 2% increase in revenue year-over-year, and a 0.9% same-store sales increase.

Canada’s EBIT loss for the first nine months of the year is $612 million or $0.95 per share. On the surface, that’s tough to swallow, but investors knew these losses were coming — you don’t open 124 stores in one year without a whack of overhead hitting the books. Going forward, TGT should see a ton of improvement just by opening more stores and sharing expansion costs over a wider network.

Walmart’s Q3 earnings were less than stellar, but it did manage to grow them by 2.8% year-over-year — up to $3.73 billon. Unlike TGT, the company is at least heading in the right direction. That comparison is a bit unfair, however, because Target’s Canadian operation is still in start-up mode. Walmart’s international outposts, including Canada, are fairly mature with better margins. A fairer comparison is to examine both companies’ U.S. operations.

In the third quarter, WMT same-store sales dropped by 0.1% in the U.S. — its third consecutive quarter with declining comps. Target’s comps were up 0.9% in Q3, although both companies missed analyst estimates. Walmart’s operating income in the quarter grew 5.8% to $5.1 billion. Target’s declined by 8.8% to $1.5 billion. On the top line, Walmart’s revenues increased 2.4% in the quarter compared to 2% for Target.

Winner: Walmart

Intangibles

I’ll keep this short and sweet.

WMT doesn’t appear to have many catalysts that can make its stock move. TGT, on the other hand, has two potential catalysts that aren’t currently reflected in its stock. The first — Canada — is a huge shadow hanging over the company. Uncertainty creates buyer reluctance. Until investors can see the light at the end of the tunnel, its stock will remain under pressure.

The second catalyst is its U.S. segment, which needs to lower its SG&A margin. To that end, it announced in October that it was laying off 150 employees at its Minneapolis headquarters. While it’s never fun letting people go, one look at its income statement speaks volumes about its cost controls. It can and will do better.

Winner: Target

Verdict

I’ve recommended Walmart in the past, and I think it makes a decent core holding in most portfolios. But when compared directly to Target, there’s no confusion — Target’s the better stock for the next 2-3 years.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities. 


Article printed from InvestorPlace Media, http://investorplace.com/2013/11/tgt-wmt-report-card/.

©2014 InvestorPlace Media, LLC

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