Published August 18th, 2016
Wal-Mart (WMT) and Target (TGT) are the 1st and 2nd largest discount retailers in the United States, based on net income.
The two easily recognizable companies are direct competitors. Both are Dividend Aristocrats with long dividend histories:
- Wal-Mart has paid increasing dividends for 43 consecutive years
- Target has paid increasing dividends for 45 consecutive years
Both companies have above-average dividend yields as compared to the S&P 500:
- Wal-Mart’s dividend yield is 2.7%
- Target’s dividend yield is 3.4%
Both companies have below average price-to-earnings ratios:
- Wal-Mart’s price-to-earnings ratio is 16.1
- Target’s price-to-earnings ratio is 13.4
Target and Wal-Mart both have strong competitive advantages brought about by their brands – which are both well-known for prices – and the tremendous economies of scale both businesses have.
The combination of higher than average dividend yields, lower than average price-to-earnings ratios, long dividend histories, and strong competitive advantages make both Target and Wal-Mart favorites of The 8 Rules of Dividend Investing.
Despite their similarities, these companies posted very different results in their most recent quarter. Target’s quarterly release came out August 17th. Wal-Mart’s came out August 16th. This article takes a look at the difference in performance these companies showed in their most recent quarters.
Target vs. Wal-Mart: Quarterly Results
Target’s adjusted earnings-per-share grew 0.5% in its most recent quarter. Wal-Mart’s adjusted earnings-per-share declined 0.9%.
Both companies showed mediocre results in their most recent quarter judging by earnings-per-share.
One of the most important metrics for retailers – especially mature retailers with limited expansion opportunities – is changes in comparable store sales.
- Wal-Mart U.S. comparable store sales increased 1.6%
- Target comparable store sales decreased 1.1%
This is the biggest difference in quarterly results between the two companies. Rising comparable store sales show that the company as a whole is healthy and growing. Falling comparable store sales are a sign consumers are choosing competitors.
Wal-Mart has focused heavily on improving its overall customer experience. The company has increased employee wages (to increase engagement) and invested heavily in digital sales and in store pickup. Wal-Mart is doing everything it can to improve the shopping experience in its stores. These investments continue to impact earnings, which is why Wal-Mart’s earnings are slightly lower than the same period last year. The company is aiming for long-term success instead of short-term gains.
The company’s plan appears to be working. Comparable store sales at Wal-Mart U.S. have increased for 8 consecutive quarters.
Target, on the other hand, saw comparable store sales decline in its most recent quarter. Target is taking many of the same steps Wal-Mart has. Here’s what Target CEO Brian Cornell said on the subject:
“We remain focused on our enterprise priorities as we continue to see the benefits of investing in Signature Categories, store experience, new flex-format stores and digital capabilities. Although we are planning for a challenging environment in the back half of the year, we believe we have the right strategy to restore traffic and sales growth over time.”
Target also reduced its guidance for full year earnings. The company is now expecting full year adjusted earnings-per-share of $5.00 versus its previous guidance of $5.30. For comparison, the company had earnings-per-share of $4.69 in 2015. The new guidance shows expected growth of 6.6% in fiscal 2016. This growth together with the company’s 3.4% dividend yield gives investors an expected total return of 10.0% for 2016 – which is quite good in today’s low interest rate environment.
Wal-Mart’s adjusted earnings-per-share guidance for its current fiscal year is $4.25. For comparison, Wal-Mart generated earnings-per-share of $4.57 in 2015. The company is expected to return to growth in calendar year 2017.
Share Repurchases Galore
Both Wal-Mart and Target trade at fairly low price-to-earnings ratios. Both companies managements are taking full advantage of this by engaging in large share repurchases.
- Wal-Mart spent $2.12 billion on share repurchases last quarter
- Target spent $1.35 billion on share repurchases last quarter
This is 3.2% of Target’s current market cap – repurchased in 1 quarter alone. Wal-Mart’s repurchases come to 0.9% of the company’s market cap; still a large amount when annualized.
Target’s management should be applauded for taking full advantage of low stock prices. When share repurchases are done when shares are below fair value, shareholders win.
Investment Opportunity for Long-Term Investors
The market responded negatively to Target’s quarterly announcement, and positively to Wal-Mart’s earnings announcement.
Source: Google Finance
In the short-run, Target’s weak results create a better buying opportunity for the stock. The company’s current 13.2 price-to-earnings ratio is below its 10 year historical average price-to-earnings ratio of 15.5.
The company looks more undervalued when compared to the S&P 500. Over the last decade, Target has traded for a price-to-earnings multiple of 0.9x that of the S&P 500. The S&P 500 is currently trading for a price-to-earnings multiple of 25.2. This implies a fair price-to-earnings multiple of 22.7 for Target.
Depending on how you look at it, Target stock is either very undervalued or moderately undervalued. Compared to the overall market, Target is very undervalued. Compared to its historical average price-to-earnings ratio, Target is somewhat undervalued.
Given the choice between Wal-Mart and Target, I would invest in Target at current prices. I am long both Wal-Mart and Target. A lowered guidance from Target’s management has created a buying opportunity for long-term investors.
This is not to say that Wal-Mart is a poor investment; on the contrary, it is also a high quality discount retailer trading for a low price-to-earnings ratio.
Both Wal-Mart and Target perform well during recessions. Wal-Mart is one of the most recession resistant stocks around.
When the economy goes into a recession, consumers look to stretch their dollars further. This hurts many businesses – especially luxury businesses. But it helps (or at least hurts much less) discount retailers. That’s because consumers looking for bargains naturally seek out low priced discount retailers.
Both Target and Wal-Mart make excellent long-term holds. Both are trading at low price-to-earnings multiples and have above average dividend yields.
Recent results showed weakness at Target – but management is still expecting 6.6% earnings-per-share growth on the year. Over the long-run, both companies will likely generate favorable results for investors. At this time, Target is priced better than Wal-Mart, because of its weaker quarterly results.