360°
Spreadsheet
The battle is back. This week two giant retail stocks square off. The sector as well as overall market outlook is bullish, but the rising U.S. 10-year yield will inject volatility and create buying opportunities.
Question: Which of these two American retail stock giants has risen more since Covid: Target or Walmart? If you’re thinking Walmart, you’re wrong. Since February 17, 2020, Target has soared nearly 110% while Walmart has climbed 20%. If you think that’s a mistake, then consider year-to-date Target has climbed 38% while Walmart has been flat. “Wasn’t Walmart one of the lockdown winners, staying open and taking business away from mom-and-pop stores?” you ask. “Doesn’t Walmart have a thriving online and pick-up business?” Yes and yes.
However, Target, which has stayed out of the limelight boasts a strong customer loyalty program. It also ironed out its e-commerce problems of 2019, boasts a solid balance sheet and announced stellar Q2 results. Comp sales rose 8.9% from Q2-2020, comp stores sales climbed 8.7%, comp digital sales popped 10%, and TGT stock’s adjusted EPS of $3.64 doubled since 2019. Same-day services offered even better numbers: drive-up sales soared 80% YOY in Q2 while order pick-ups jumped 30%. Also YOY in Q2, revenues rose 9.38% and EPS climbed 8.96%. Good past performance, you say, but what about growth? Wall Street projects Target’s EPS to rise at a compound annual growth rate (CAGR) of 9.37%.
Then, there are share buybacks, amounting to US$1.5 billion in the last quarter with another US$15 billion coming down the pipe. More candy to entice shareholders: the dividend leapt from US $0.68 to US$0.90 last June. TGT stock currently pays 1.48% which is safe given its 23.86% payout ratio.
TGT stock’s fundamentals look healthy. It trades at only 19.2x earnings, far below peers like TJX and even Dollar General. Cash flow and earnings also beat the sector. Gross margins come in at 30.25% vs. the industry’s 23.79% and its profit margin of 6.29% beats the sector’s 4.9%. Similarly, ROE and ROI beat. The street projects 17% more upside to $284.29, based on 14 buys and four holds for the retail stock.
So, Target is an obvious buy, right? Not exactly. Shares have run up so much, labour costs are rising in this post-Covid recovery economy, and supply chain contraints could remain a headache (at least for another quarter), so it would be prudent to enter Target with a modest position. Consider this a partial buy for the long term. If you already own an outsized position, take a few profits, but hang on for the ride.
Walmart remains the world’s number-two retail stock behind Amazon, and yet the stock has gone nowhere in 2021, down 1% YTD. With some justification, Walmart is viewed by Wall Street as a pandemic play. After all, will consumers spend time inside shops when they can now be travelling or dining?
The problem is that Walmart is competing with its own 2020 lockdown success. In Q2 this year, its American e-commerce sales rose 6%, but were down from 37% growth from Q1 and from 69% in Q4. In Q1, EPS tumbled 30% YOY to $0.97.
However, visits to its brick-and-mortar stores climbed 2.9% last July compared to July 2019, fueled by the U.S. child tax credit and early back-to-school spending. WMT stock guided its EPS to $6.20-6.35 for the full year while the street had expected $6. And the retailer announced it will buy back US$20 billion in shares and raise its dividend four pennies to $2.20 per share.
Like all retailers including Target, Walmart faces the twin challenges of labour and supply shortages. These will eventually end, but will likely linger for for the rest of this year. Fruther, the tailwind of stimulus cheques from Washington has dried up. Then, there’s Amazon. The planet’s largest retailer plans to build brick-and-mortar stores. Though Walmart’s e-commerce service and numbers are improving, Amazon remains the online king and their move into Main Street poses a serious threat to Walmart as well as Target. However, let’s temper that by remembering that Amazon will open stores of less than a third of the floor space of Walmart’s and will open shops only in California and Ohio. Meanwhile, Walmart operates 11,500 locations in 28 countries. Also, there’s no guarantee that Amazon stores will thrive.
Walmart is already preparing for this war by renovating 1,000 locations to speed up the shopping experience. The company will also need to invest more in e-commerce. In a nutshell, Walmart must become more like Amazon as Amazon turns more into Walmart. (Amazon’s July 29 quarterly report missed earnings, but that’s another story.)
The street still recommends WMT stock, expecting shares to climb 20.5% higher to $172.15, based on 17 buys and four holds. Though earnings growth is slowly improving, Walmart’s still beats its peers. However, its PE stands at a high 40x, which gives pause. ROE and ROI are in-line with the industry. WMT’s 1.54% dividend yield is based on a 61% payout ratio. Walmart is a mixed bag of pros and cons offering limited growth. Perhaps if markets pull back 10% this fall, then you can enter it. If you already, own this, hang onto it.
Winner: Target
