E-commerce players, especially Amazon, have disrupted the retail space over the past few years and led to the bankruptcy of several brick-and-mortar retailers. However, Walmart and Target continue to grow and adapt to changing industry dynamics.
The COVID-19 pandemic led to consumers piling up groceries and other essentials amid lockdowns. This stockpiling benefited the sales of certain categories of Walmart and Target. E-commerce sales of both companies witnessed a sharp spike in the fiscal first quarter. However, sales of certain discretionary items took a hit.
Walmart and Target are set to announce their fiscal second-quarter results soon. Analysts expect strong e-commerce sales and some improvement in physical store sales due to easing of the lockdown restrictions.
Using TipRanks’ Stock Comparison tool, we lined up the two alongside each other to analyze what the near-term holds for these big-box retailers.
Walmart (WMT)
Walmart has sustained its leadership position in a highly competitive retail landscape due to its continued focus on low prices and aggressive investments in e-commerce. The company’s cost control and productivity efforts have also helped in improving its performance.
Walmart’s FQ1 2021 (Feb to April quarter) revenue increased 8.6% year-over-year to $134.6 billion. The company’s US comparable sales surged 10% thanks to pandemic-led demand for food and essentials. Towards the end of the quarter, the company also saw higher sales in categories like video games, toys and televisions as people were restricted to their homes.
Walmart was already experiencing strong e-commerce growth. But the COVID-19 pandemic took the e-commerce sales to another level. The company’s first quarter US e-commerce sales surged 74%. Notably, focus on online grocery helped in boosting digital sales.
However, costs to support increased workforce and additional benefits impacted the company’s first-quarter profitability. Walmart hired over 235,000 new associates in the US. The first-quarter gross margin was also hurt by a spike in sales of lower-margin categories.
UBS analyst Michael Lasser believes that Walmart’s strong performance likely continued through the second quarter. He expects a 6% comparable sales growth in the second quarter, which is higher than the 5.5% consensus. The five-star analyst also feels that the food-at-home trend amid the coronavirus crisis would continue to benefit Walmart’s grocery sales.
He explained, “WMT’s commitment to its EDLP [Every Day Low Price] strategy likely drove value for its customers, especially at a time when many competitors decreased promotions, thereby raising prices. Also, its SSS [Same Store Sales] likely benefited from robust digital sales (we model 55% digital sales growth at Walmart US) as more shoppers favored ordering online.” As a result, the analyst reiterated his Buy rating with a price target of $135 on August 4.
Overall, 18 Buy ratings and 5 Holds assigned in the last three months add up to a bullish ‘Strong Buy’ analyst consensus for Walmart stock. With an average price target of $140.58, analysts see an upside of 6.6% over the coming 12-months. (See Walmart stock analysis on TipRanks)
Target (TGT)
Like its rival Walmart, Target also gained from the spike in the demand for groceries since the implementation of at-home restrictions due to COVID-19. However, it is notable that Target has a lower exposure to groceries compared to Walmart.
Target’s FQ1 2020 revenue increased 11.3% year-over-year to $19.6 billion. The company’s comparable sales grew 10.8% essentially due to a 141% rise in digital sales while store comparable sales grew by just 0.9%.
Target’s same-day delivery services, comprising Order Pick Up, Drive Up and Shipt services, boosted the company’s e-commerce sales as customers avoided going to the stores to curb the spread of the coronavirus. These fulfillment services helped the company’s e-commerce site win 5 million new customers in the first quarter. Target’s acquisition of last-mile platform from start-up Deliv is expected to further enhance its delivery capabilities.
However, Target’s first-quarter margins took a hit as demand for higher-margin merchandise like apparel slowed down and less profitable categories like food and essentials grew. Also, higher wages and benefits to support employees weighed on the bottom line.
Meanwhile, Cowen analyst Oliver Chen is optimistic about Target’s prospects owing to its exposure to home décor, food, and essentials. He notes “We acknowledge some weakness in the back-to-school portion of Home, but believe shoppers nesting at home will be a key category driver over the coming quarters.” The analyst expects the company’s fulfillment capabilities to favor its performance. The four-star analyst reaffirmed his Buy rating for Target stock on August 4 with a price target of $150.
The rest of the Street has a cautiously optimistic ‘Moderate Buy’ analyst consensus for Target stock with 10 Buy ratings, 5 Holds, and one Sell. At $130.27, the average price target implies a 2.01% downside potential lies ahead. (See Target stock analysis on TipRanks)
Bottom Line Looking at the stock gain over the past one-year, Target has delivered higher returns compared to Walmart. However, based on Wall Street consensus and upside potential, Walmart currently seems to be the better choice.
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment
