There’s an age-old battle between Target Corporation (NYSE:TGT) and Wal-Mart Stores, Inc. (NYSE:WMT) that leads investors to question which is the better stock. Target stock has gone up nearly 8% each year for the past five years, while Walmart stock only averages a little over 3% in the past five years. Likewise, TGT stock yields 3.2% and the company’s earnings grew 10.7% last quarter, but WMT stock only yields 2.8% and its earnings declined 8.2%. Yet investors generally view Target as weaker than Walmart — is this viewpoint wrong?
Lately, TGT stock has certainly been the weaker big-box retailer.
It’s up a measly 0.67% year to date, compared to WMT’s 13.8% bump. And its past series of missteps — a massive breach of customers’ credit and debit card information in 2013, its ill-conceived Target Canada launch, its controversial decision to allow transgender customers to use the bathroom of their choice, among others — have damaged the company’s once pristine reputation with the general public and Wall Street.
But the above numbers put Target stock’s recent drop-off in perspective. Sprinkle in a relatively low price-to-earnings ratio of 13 (compared to Walmart’s P/E of 15), solid earnings growth projections for this year and next and some nice share-price momentum over the last six weeks, and you have a stock that looks pretty attractive.
Sales Declines Are Dragging TGT Stock Down
There’s just one problem with the picture: Target’s sales aren’t what they used to be. Revenues have only made a small comeback in the most recent quarter after significant declines in the past two quarters, and same-store sales have tumbled for two straight quarters. The store just doesn’t have the same buzz it once did.
But Walmart’s sales have been equally uninspiring, failing to reach more than 1% growth for seven straight quarters. Putting the string of embarrassing headlines aside, Target has the same problems as its much larger competitors: Americans are turning their backs on the big-box stores in favor of the convenience of online shopping.
Therefore, the key for Target stock to return to growth is online sales. Right now, online sales account for less than 5% of TGT’s total sales, despite a 26% uptick in the third quarter, ahead of Walmart’s 20.6% digital growth. In fact, Target has routinely defeated WMT in that department, and it should continue to do so given that the average Target shopper is younger than the average Walmart shopper. (TGT’s customers also make about 25% more money than WMT’s customers do, which means they’re more likely to swallow the extra shipping costs that come with online shopping.)
Walmart has Target stock beat in same-store sales growth, as its in-store customer base tends to be more loyal.
And while WMT is investing heavily to improve its e-commerce sales, with plans to spend more than $2 billion in digital improvements this year and next and its recent buyout of online marketplace startup Jet.com, TGT’s customer demographics should still give it a leg up on future digital sales growth. When investing for the long haul, I’ll take digital growth over same-store sales growth any day.
Bottom Line on Target Stock
The name Target — or “Tar-jay,” as frequent shoppers affectionately call it — still means something in the retail world. As more consumers do their shopping online in the years to come, that name recognition should attract more shoppers to the company’s website.
Although, I don’t love any retailer that relies heavily on in-store sales in the age of online shopping, TGT stock is a far better buy than Walmart stock overall. This is true despite the fact that WMT has had a good year and Target hasn’t.
Ultimately, Amazon.com, Inc. (NASDAQ:AMZN) is a better long-term growth option than either stock. But if you prefer value and income in your stocks (two things AMZN doesn’t offer), and are looking to add a retailer to your portfolio as a play on swelling consumer confidence, TGT stock is a good bet.
If you buy Target stock at current valuations, you’re likely to fare better in 2017 than if you buy WMT stock.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.