Target seems to be falling behind Walmart in the U.S. market.
Target (TGT 0.57%) recently posted its latest earnings report. For 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 still roughly matched analysts' expectations. Its comparable-store sales dropped nearly 4%, which marked the fourth consecutive quarter of declining comps.
On the bottom line, adjusted earnings per share (EPS) dipped 1% to $2.03 and missed the consensus forecast by $0.02. Target's stock stumbled after that disappointing report -- extending its 36% decline over the past three years -- as Walmart's (WMT 0.83%) stock rallied 37% during the same period. Let's review the four reasons Walmart outperformed Target by such a wide margin.
Image source: Walmart.
1. Superior scale and diversification
Target operated 1,963 stores at the end of the first quarter, but all of them were located in the United States. Walmart is a larger and more broadly diversified retailer that operates 10,607 stores and numerous e-commerce sites across 19 countries. In the U.S. market, it operates 4,609 Walmart stores and 599 Sam's Club stores.
Walmart's international business owns Flipkart, one of India's largest e-commerce marketplaces, and a major stake in the Chinese e-commerce giant JD.com. Its Sam's Club business competes against Costcoin the membership-driven warehouse club space.
That scale and diversification makes Walmart a safer long-term retail play than Target, which is heavily dependent on the U.S. market. Both companies are countering Amazon by turning their own brick-and-mortar stores into fulfillment centers for online orders, but Walmart has a much larger network of stores than Target.
2. Better comps growth
Target's comps fell 4% in fiscal 2023 (which ended in January 2024), as it struggled with inflationary headwinds for consumer spending and theft and safety issues. This led to the closures of some of its smaller-format stores. The company also suffered from a boycott by conservative groups in response to some controversial products in its Pride Month Collection.
Target generates a lower percentage of its sales from groceries -- which are more resistant to macro headwinds -- than Walmart. In the most recent fiscal years, groceries accounted for 23% of Target's sales and 60% of Walmart's U.S. sales.
Walmart also faced inflationary headwinds, theft-related issues, and a few political-driven boycotts over the past year but fared lot better than Target. In fiscal 2024 (which ended this January), Walmart's U.S. comps (excluding fuel) rose nearly 6%. Sam's Club posted nearly 5% comps growth on the same basis, while its international sales grew 11% in constant-currency terms. The company's total revenue rose 6% for the full year.
For fiscal 2024, Target expects its comps to only rise 0%-2%. For fiscal 2025, Walmart expects its consolidated net sales to come in at the "high-end or slightly above" its original forecast for 3%-4% growth.
3. Superior earnings growth
As Target's growth cools off, it's limiting its markdowns and cutting costs to boost its EPS. But despite those efforts, it only expects adjusted EPS to increase by a midpoint of 2% this year. Walmart, which is also streamlining its spending to counter the macro headwinds, expects its split-adjusted EPS to rise by a midpoint of 4% this year.
4. It deserves its higher valuation
Based on those estimates, Target might seem like the 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 1.3% yield.
However, Walmart deserves that higher valuation because it's better diversified, comps are rising, and it's generating strong earnings growth. Walmart's U.S. growth also suggests that Target is suffering company-specific challenges.
Walmart will likely stay ahead of Target
Walmart and Target both survived the retail apocalypse, which wiped out many of their brick-and-mortar peers over the past 14 years. They also grew through the COVID-19 pandemic by keeping their stores open and selling more products online.
But today, Target is gradually falling behind Walmart in the U.S. market. It doesn't sell enough groceries to offset the inflationary headwinds and is exposed to the faster-growing overseas e-commerce and warehouse club markets. Therefore, I believe Walmart will continue to outperform Target by a significant margin for the foreseeable future.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, JD.com, Target, and Walmart. The Motley Fool has a disclosure policy.
