Big-Box Brawl: Walmart Stock (WMT) vs. Target Stock (TGT)

Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT) have had a rough time over the last few years, as everything from soft consumer spending to security breaches have pressured results, to say nothing of WMT or TGT stock.

Walmart WMT stockBut, as first-quarter earnings season shows us, the fortunes of one of these names is starting to improve.

It used to be that all a discount-retailer needed to do was undercut just about everyone else on price. That always worked for WMT, anyway. Target, meanwhile, was able to position itself as the slightly nicer — and slightly pricier — alternative to WMT. For a good long while, Walmart stock and Target stock were great holdings.

A slew of forces have changed the equation for TGT and WMT. The emergence of online shopping and tremendous expansion of the dollar stores mean that low prices are no longer the exclusive purview of discount stores.

A lack of room for their own expansion plans and a public that appears increasingly tired of big-box retailers are just a couple of the other challenges facing WMT and TGT. The bottom line, however, is that both Walmart stock and Target stock have lagging the S&P 500 in this long bull market.

It’s pretty clear that one of these stocks is superior to the other as the companies grapple with their problems with mixed success. Here’s a look at some of the pros and cons of Walmart stock and Target stock.

Walmart (WMT)

Walmart stock has been a dud for some time now, and there’s wasn’t much in its first-quarter earnings report to suggest any kind of turnaround soon.

The world’s largest retailer missed Wall Street estimates in the most recent quarter, thanks to higher wages, a stronger dollar and lower-income consumers concerned more with paying off debt than splurging at WMT.

At first, the key issues hampering WMT and Walmart stock throughout the recovery have been joblessness and stagnant wages. And even though hiring has picked up, wages gains remain repressed.

But now currency woes are clobbering WMT, too. WMT derives about a quarter of its total sales from international markets, and the strong dollar is taking an axe to those receipts. It’s also getting worse. WMT now sees unfavorable foreign exchange costing the company $14 billion in revenue this year, up from a prior forecast for $10 billion.

Between punishing macroeconomics and self-inflicted wounds, WMT is off 11% for the year-to-date.

Target (TGT)

Target, meanwhile, had a very happy first quarter. Earnings beat Wall Street estimates, helped by strong online sales and the slightly more upscale merchandise it was once known for.

And if that weren’t good enough news for anyone holding Target stock, the company resumed its share buyback program, which was put on hold almost two years ago in wake of its infamous data hack.

Just as WMT is getting back to its always low prices roots, TGT is returning to its tradition of offering higher-margin merchandise at higher prices.

To that end, the adoption of some moves from the department store and upscale supermarket playbooks is paying off. A focus on brand-name fashion helped revenue top analysts estimates, while the inclusion of more organic and artisanal goods to the grocery section helped attract traffic.

The better-than-expected results led TGT to hike its full-year earnings forecast, and shares jumped on the news. For the year-to-date, Target stock is up a market-beating 5%.

The Verdict

This one was easy to see coming. Target appears much further along with its turnaround plan than does Walmart. Additionally, TGT doesn’t depend on international revenue like WMT, leaving much less exposed to currency risk.

And by going back to its slightly more upscale roots, TGT should be less susceptible to the ongoing stagnation in consumer spending. WMT’s large core of lower incomes shoppers tend to be more economically sensitive than other consumers.

As for valuation, TGT trumps WMT once again. Both stocks go for about 15 times forward earnings, despite TGT having better growth prospects. The yield on the dividends are neck-and-neck too — 2.5% for WMT and 2.6% for TGT.

Target stock looks poised for more upside this year. Walmart stock has been trading sideways for two years with nothing on the near horizon to break the spell.

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

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