InvestorPlace’s Luke Lango recently discussed the seven retail stocks to buy entering the 2019 holiday season. Although Target (NYSE:TGT) and Walmart (NYSE:WMT) were both on the list, I like Target stock better.
In August, I pointed out that Target CEO Brian Cornell’s turnaround plan has been so successful, that the discount retailer is no longer considered an also-ran for the almighty consumer dollar.
This Black Friday, Thanksgiving, and Cyber Monday, I see Target giving Walmart a run for its money both in-store and online as well. Target reports its third-quarter results on Nov. 20 after the markets close. We’ll know more about the upcoming holiday shopping season at that time.
In the second quarter, Target’s same-store sales grew by 1.5% in-store and 1.8% online for a 3.4% increase. While that was almost half the growth in Q2 2018, the combined 24-month stack was 9.9%, the company’s best performance in more than a decade.
Walmart reported its Q3 2020 results on Nov. 14. While they were good (Walmart’s U.S. same-store sales rose 3.2%, they were 20 basis points lower than in the same period a year earlier) the retailer’s overall operating profits actually fell by 4.1% to $4.8 billion excluding currency.
On a two-year stack, Walmart grew its U.S. same-store sales by 6.6%. Target expects same-store sales growth of 3.4% in both the upcoming Q3 2019 report and Q4 2019. If it meets its forecast of 3.4% on November 20, Target will have a comparable 24-month stack of 8.5%, 190 basis points higher than Walmart.
Sure, you can point out that Walmart’s growth is a lot more evenly distributed than Target’s, but 24 months ago, I’m confident most retail experts didn’t see Target delivering such good results.
Walmart just replaced Greg Foran, its head of U.S. stores for the past five years, who’s leaving Jan. 31 to become CEO of Air New Zealand, with John Furner, former CEO of Sam’s Club. Furner’s been replaced at Sam’s Club by Kathryn McLay, who most recently in charge of Walmart’s Neighborhood Markets business.
Both capable executives, it will still take them some time to settle into their new responsibilities. That’s not good considering Walmart has some eCommerce issues.
From where I sit, Target’s got more momentum than Walmart both in-store and online.
Digital Sales and Target Stock
Target’s digital sales grew by 34% in the second quarter accounting for over half (1.8%) the retailer’s 3.4% same-store sales growth, and 30 basis points higher than a year earlier.
In Walmart’s second quarter, its U.S. e-commerce sales were $4.8 billion or 5.6% of its U.S. net sales. Meanwhile, Target, which hasn’t made nearly as many high-profile moves in this area, generated $1.3 billion in its second-quarter or 7.3% of its total sales.
Retail analyst Neil Saunders, the managing director of GlobalData Retail, recently pointed out that Walmart’s declining operating income in the third quarter might have been due to an overreliance on grocery-based eCommerce sales.
“To change this, Walmart needs to improve its position in non-food, especially online,” Saunders wrote November 15. “Driving a greater volume of higher-margin general merchandise via e-commerce is critical to bolstering operating numbers.”
Meanwhile, Target’s food sales only account for 20% of its total volume compared to 50% for Walmart.
Target continues to roll out its Good & Gather brand, which it launched in September. By the end of 2021, it expects to have more than 2,000 items available in stores under its own private label brand name.
“We’ve been hard at work [on this] for the last couple years,” Stephanie Lundquist, head of food and beverage for Target, told CNBC. “Food and beverage play such an important role for Target’s business … for the Target experience.”
Interestingly, Target’s grocery business has seen seven consecutive quarters of positive same-store sales growth, a sign that shoppers are no longer just visiting for fashion deals.
That’s not good news if you’re a Walmart shareholder.
The Bottom Line on Target Stock
The Target stock price is up 74% year to date through Nov. 15, including dividends.
I believe that Target stock could get to $200 a lot sooner than many think, in part because of the strong leadership of Cornell. He’s taken huge steps to make Target relevant in the grocery business. Those steps ought to start paying dividends in 2020.
As retail stocks go, I think Target’s upside is far greater than Walmarts at this point in its development.
This time next year we’ll find out if I was right or simply blowing smoke.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.