4 Reasons to Forget About Your Target and Shop Walmart Instead

Objective (NYSE: TGT) recently published its latest results report. In the first quarter of fiscal 2024, which ended on May 4, the retail giant’s revenue fell 3% year-over-year to $24.53 billion, but was still roughly in line with analyst expectations. Comparable store sales fell nearly 4%, marking the fourth straight quarter of sales decline.

Overall, adjusted earnings per share (EPS) fell 1% to $2.03 and were $0.02 below the consensus estimate. Target shares fell after this disappointing report – deepening their decline of 36% over the past three years – when Walmart‘S (NYSE: WMT) during the same period, the company’s shares increased by 37%. Let’s look at four reasons why Walmart had such a big advantage over Target.

1. Excellent scale and diversification

At the end of the first quarter, Target operated 1,963 stores, but all of them were in the United States. Walmart is a larger and more diversified retailer that operates 10,607 stores and numerous e-commerce sites in 19 countries. In the US market, it operates 4,609 Walmart stores and 599 Sam’s Club stores.

Multinational company Walmart owns Flipkart, one of India’s largest e-commerce marketplaces and a major stake in the Chinese e-commerce giant JD.com. Sam’s Club’s business is its competition Costco in the membership-driven warehouse club space.

This scale and diversification make Walmart a safer long-term retailer than Target, which is heavily reliant on the U.S. market. Both companies are striking back Amazon by converting its own brick-and-mortar stores into online fulfillment centers, but Walmart has a much larger store network than Target.

2. Better composition growth

Target’s results fell 4% in fiscal 2023 (which ended in January 2024) as the company grappled with inflationary factors affecting consumer spending and theft and security issues. This led to the closure of some smaller stores. The company also suffered from a boycott by conservative groups in response to some controversial Pride Month products.

Target generates a lower percentage of its sales from groceries – which are more resilient to adverse macro factors – than Walmart. In recent fiscal years, groceries accounted for 23% of Target’s sales and 60% of Walmart’s U.S. sales.

Walmart has also faced inflationary headwinds, theft problems and several political boycotts over the past year, but it has performed significantly better than Target. In fiscal 2024 (which ended in January), Walmart’s U.S. metrics (excluding fuel) increased nearly 6%. On the same basis, Sam’s Club saw almost 5% sales growth, while its international sales increased 11% on a constant currency basis. The company’s total revenues were up 6% for the year.

The story continues

Target expects its metrics to increase only 0% to 2% in fiscal 2024. For fiscal year 2025, Walmart expects consolidated net sales to be at or just above its original guidance of 3% to 4% growth.

3. Outstanding profit growth

As growth slows, Target is cutting markdowns and cutting costs to boost EPS. However, despite these efforts, it expects adjusted EPS to grow only an average of 2% this year. Walmart, which is also optimizing its spending to counter unfavorable macroeconomic factors, expects split-adjusted EPS to grow an average of 4% this year.

4. Deserves a higher rating

Based on these estimates, Target may seem like a cheaper play at 16 times this year’s earnings. Walmart trades at 28 times forward earnings. Target’s forward dividend yield of 3.1% is also higher than Walmart’s rate of 1.3%.

However, Walmart deserves a higher valuation because it is better diversified, sales are growing and it is generating strong earnings growth. Walmart’s growth in the U.S. also suggests that Target faces company-specific challenges.

Walmart will likely overtake Target

Both Walmart and Target have weathered the retail apocalypse that has wiped out many of their traditional competitors over the past 14 years. They have also expanded during the COVID-19 pandemic by keeping stores open and selling more products online.

But today, Target is gradually giving way to Walmart in the US market. It doesn’t sell enough groceries to offset inflationary headwinds and is exposed to faster-growing overseas e-commerce and warehouse club markets. Therefore, I believe that Walmart will continue to significantly outperform Target for the foreseeable future.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Leo Sun has positions at Amazon. The Motley Fool ranks and recommends Amazon, Costco Wholesale, JD.com, Target and Walmart. The Motley Fool has a disclosure policy.

“4 Reasons to Forget About Your Target Goal and Shop Walmart Instead” was originally published by The Motley Fool