Walmart (NYSE: WMT) and Target (NYSE: TGT) are two of the nation's top retailers. But their stocks have been going in opposite directions this year. As of the end of last week, the former was up an impressive 72% while the latter's valuation had fallen by 12%. Despite these businesses being competitors and offering many similar products, the stocks themselves couldn't be more different of late.
What's behind the diversion in their performances this year, and is the current trend likely to continue?
Two earnings reports; two entirely different stories
Quarterly earnings reports can not only give investors insights into how a business is performing. They can also help provide reasoning behind the numbers, to help tell a story.
Last week, Walmart released its numbers for the period ending Oct. 31, and it posted strong results, with sales rising by 5.5% to $170 billion, driven by strong e-commerce sales growth of 27%. The company's chief financial officer, John David Rainey, highlighted a lot of continued consistency from consumers, saying that "U.S. customers remain resilient."
That's in stark contrast to the message investors heard from rival Target. The retailer also reported earnings last week (its quarter went until Nov. 2), but the results were far less impressive, with revenue of $25.7 billion only rising by 1.1% from the same period last year. In Target's case, its CEO highlighted solid traffic numbers but said that "consumers continue to spend cautiously, most notably on discretionary items." The company also encountered supply chain challenges due to a recent port strike. Target's net earnings fell by 12.1% during the quarter to $854 million.
Why is Walmart doing so much better than Target?
Walmart's stock continued to rally following its solid earnings performance while shares of Target crashed after the retailer's uninspiring quarter. There are a couple of things to note to help explain the disparity between these two companies.
The big difference comes down to product mix. While around 60% of Walmart's revenue comes from groceries and other day-to-day essentials, it's discretionary items that make up that much of Target's total sales. And nowadays, with consumers looking for ways to save due to inflation, there may be less demand for discretionary purchases. Plus, with Walmart seen as the place for essentials, it could make sense for consumers to make any infrequent discretionary purchases at its stores (or as part of their online orders) while loading up on groceries and other day-to-day purchases, than specifically going to Target.
Another thing to consider is logistics. Walmart operates an efficient and highly effective network and can adapt quickly to changing situations. While Target felt the effects of a strike and supply chain issues on its results, Walmart appeared to be more adaptable and versatile. Walmart's operating income rose by 8.2% during the quarter, and its cost of sales increased at a lower rate than sales (5.1% vs 5.5%). But the opposite was true for Target, where operating income declined by 11.2% and cost of revenue rose by 1.2%, which was a slightly faster pace than revenue growth -- 1.1%.
With not only sales being better for Walmart but overall efficiency also looking superior, it's little wonder why this top retail stock has performed much better than its rival.
Is Walmart still the better buy than Target?
Walmart's performance this year has been stellar, but perhaps the stock would not be doing as well if not for Target's struggles. By doing so poorly, its rival may have made it easier for investors to justify buying shares of the bigger box chain.
But investors shouldn't overlook valuations. As well as Walmart has been doing, the stock isn't cheap -- it's trading at 37 times earnings, which is a rich valuation for a business that's growing in single digits. Target, meanwhile, is trading at just 13 times earnings.
The danger is that Walmart's high valuation could limit future returns for investors who buy the stock today. But at the same time, with the economy still facing challenges, Target isn't a slam-dunk buy just because of its low valuation, either, as it may continue to struggle in growing its earnings in the quarters ahead.
I think Walmart is the better buy right now, but investors should brace for the possibility of a slowdown in the short term, especially if there's a pullback in the markets. But in the long run, there could still be a lot of potential for the business as it continues to expand its e-commerce operations.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target and Walmart. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
