Retailing Smackdown: Wal-Mart vs. Target

Both are mending, but only one looks like a profitable short-term bet.

By InvestorPlace May 17, 2012 3:20PM

Image: Target © Bloomberg/Getty ImagesBy Dan Burrows

Being a discount retailer coming out of the dot-com recession of a decade ago was a pretty good place to be. Wal-Mart (WMT) and Target (TGT), the two biggest discount chains, were sitting pretty and offering investors defense as cash-strapped consumers traded down from department stores in search of bargains and everyday low prices.

My, how times have changed. Wal-Mart, the world's biggest retailer, and Target, the chic-cheap discounter, are just now regaining their footings in the long aftermath of the Great Recession.

New competition in the rise of the dollar stores and online retailers like Amazon (AMZN) is partly to blame. But it's also the case that low-income customers have been disproportionally hammered by joblessness, high gas prices and a housing market that's fallen and can't get up.

Wal-Mart's stock jumped Thursday after the company's latest quarterly earnings beat expectations, and Target's latest results beat the Street, too. In both cases, the retailers showed indications that they're making the necessary adjustments to get back on track in the toughest economic environment they've ever faced.

Sure, doubling down on discounts or everyday low prices helped drive revenues, but only by putting already thin profit margins in jeopardy. And although a warm spring, early Easter and easing gas prices helped Wal-Mart and Target rebound from a weak end of 2011 to post solid first-quarter results and outlooks, those boosts don't guarantee a thing as we head into the second half of the year.

So which stock is a better buy right now? Let's take a look at some key metrics to decide which one appears to offer more upside over the next 12 to 18 months:

Revenue growth: Target

Analysts, on average, forecast Wal-Mart's revenue to grow 5.6% this year and 4.5% next year. Target's top line is expected to grow just 4.9% this year but then expand handsomely to 5.5% in 2013. The market is forward looking, so Target wins by a nose on accelerating revenue growth.

Profit growth: Target

Wall Street forecasts Wal-Mart's profit to increase 8.2% this year and 8.6% in 2013. Target, meanwhile, is expected to grow earnings by just 0.5% this year before bouncing back to 13.3% next year. Wal-Mart offer steady, incremental growth, but Target is expected to posts huge year-over-year gains -- always a nice catalyst for a stock. Furthermore, Target's five-year growth forecast stand at 11%, better than Wal-Mart's estimate of 8.3%.

Valuation: Target

Wal-Mart trades at a 13% discount to its own five-year average on a forward earnings basis and a 5% discount by trailing earnings, according to data from Thomson Reuters Stock Reports. Target trades at an 18% discount to its own five-year average on a forward earnings basis and a 12% discount by trailing earnings. That makes Target look to be the better bargain.

Price targets: Target

Analysts' median price target on Target stands at $65, according to Thomson Reuters data. Add in the dividend, currently yielding 2.2%, and the implied upside comes to 21% in the next 12 months or so. Wal-Mart's median price target stands at $64. Add in the dividend yield of 2.7%, and the implied upside comes to 5.3% in the next 12 months or so.

Share-price momentum: Tie

Based on one-, three- and six-month relative strength and seasonality factors, both Wal-Mart and Target display price momentum that's relatively in-line with broader market performance.

Verdict: Given its accelerating revenue and profit profile and more compelling valuation, Target appears to have more upside in the next 12- to 18-months. Keep in mind, however, that despite having similar betas (or volatility metrics), Target has taken investors on a much wilder ride over the previous three-, five- and 10-year periods.

If you're bullish on the economy and market, Target is a better offensive play than Wal-Mart. However, if you're looking to play defense, Wal-Mart's superior dividend and relative share-price stability make it a solid choice for investors keen on equity income.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

More from InvestorPlace

May 18, 2012 8:17AM
First choice: Target.  Everyone parks in a parking space and not in the firelane, no one yells across the store,  everyone shopping there speaks English, clean organized merchandise, you can easily get thru the aisles without dodging huge over sized rear ends, and lastly, no muffin tops and whale tails. 
May 18, 2012 12:13AM

Why would I care? They both have been part of the demise of small mom and pop stores and brought the monopoly power of big business to import trinkets, and export our jobs.


Remember when Wal-Mart used to brag "Made in the USA" and wave their flag proudly?

What a joke! They all sold us out,  with their corporate leaders, with our governments help and the funding of the crooked banking cartel.


Time the US got back to work building quality products again instead of being seen as just fat lazy consumers and global warmongers.


Sorry, I call them as I see them, and what I see disgusts me.  

May 18, 2012 7:46AM
Go Target. Wal-mart may have better prices on some things, but Target is the better shopping experience. There are always problems at Wal-mart, and never enough checkout lanes. And then there are the other customers at Wal-mart.

I won't step foot in a Walmart store after what we experienced on multiple occasions.

I love Target for their great prices, cleanliness and customer treatment along with their return policy.

May 18, 2012 9:17AM

Looks like a tie to me...both can have 34 check out  lanes..and ONLY 2 (two) clerks

working the front....


I would pick Target, they use the English language over their PA system,  not Spanish...?

May 17, 2012 4:59PM
Get a free app from amazon and you can find out walmart doesn't have the lowest prices on most items. walmart sucks!
May 18, 2012 12:13AM

I actually tested out the pricing and found that Target and Walmart are comparable - that the megastores have more choices than our local grocery stores and are WAY less expensive.  My weekly shopping for our family of four costs at least $50 less at Target and Walmart then at most of the others - for the same brands.  For example, our favorite juice is $1.95 at T & W, but over $4 at Vons, Ralphs, Albertsons, Giant, Safeway, etc.  Outrageous!  When my children were in diapers, the price at T & W was $8.95 but nearly $13 at the others.  This adds up.  Costco and some of the other big bulk stores don't have the variety.  Sorry folks, but you cannot buy produce at Amazon.  And the mega stores for Walmart and Target both have decent produce, meats, bakery, etc. 


Between the two, however, my opinion is that in general Target stores are cleaner, have better informed employees (what they have in stock and where to find it), and much better customer service  (including having enough lanes open so that you don't have to wait as long in line.)  While I do shop at Walmart because there are actually a few products I have only been able to find there, I often leave feeling stressed out and with a headache.  Target is usually a pleasant shopping experience.

May 18, 2012 10:00AM
Target over Wal-Mart; hands down.. Kmart in a distant third place.
May 18, 2012 9:32AM
The workers in Target are friendlier and willing to help the customer than those workers in Walmart. The new Carrie Underwood album, which sells for $9.99 at Target and Best Buy, is discounted at $11.88 at Walmart. What happened to "We sell for less"?
May 18, 2012 11:59AM
It depends what I'm looking for since they different merchandise. The biggest difference between the two stores in my area is that the Target stores are cleaner.
May 18, 2012 7:51AM
I shop at both stores but I enjoy shopping at Target. Walmart is the store you have to go to if you want to get something that no one else has for that price. I worked in Walmarts as a merchandiser for a couple of years. The people who work there are not happy. They get the customers in pj's and flip flops in winter. They get the customers with there bellies hanging out and their crack showing in back.
May 18, 2012 9:52AM
Walmart seems to be falling back in a number of ways that customers can see and feel when they shop there.
May 18, 2012 11:13AM

Where I live Target and Walmart are next door neighbors and I primarily shop at Target and Kmart. One thing I do enjoy Walmart for is there prices on automotive supplies and parts (tires included). The biggest thing I dislike about Walmart are the other customers lol...brings out the worst of the trashiest people (see "the people of walmart" website for reference).

May 18, 2012 1:55PM
Target anytime, quality is better and employees don,t mind helping.  Walmart employees  for the most part are kids more concerned with the party at #$&+* house.     Walmart seems to be hiring kids wi ,that act like there there only for the paycheck dude.    Target seems to treat there employees better in many ways,and it shows the way they work withcustomers.     Its like the post office needs to be managed by UPS , bet they would make money,instead  of loose it"
May 18, 2012 9:12AM
Both Target and Wal-Mart are good bangs for the both of them. Target for clothes, Wal-Mart for food and prescriptions'. They do a great service to the public
May 17, 2012 9:41PM
if Target keeps the prices low and not raise them.. and always keep the customers  happy. I believe Target will do great in Customer wants and needs...  everytime I see stores expand and clutter the store with junk.. it collapses and folds up... but Walmart is okay at times. but its always dirty, less items in stock or out of stock , cashiers are slow and not enough cashiers when busy.. and too much clothing and items are from China.... but there both still great stores when I need something.
May 18, 2012 12:05PM
I used  to shop at Walmart,  But now I shop at Target.  Because Walmart does not know how to work with their employees,  I should know,  My wife, and friends used to work their.  So Walmart like to rep their employess  off.   Walmart is like Nazi and Cancer to the United States.
May 17, 2012 10:19PM
Wal-Mart and Target are about the same.  Target is usually a little more expensive but quality is a little better.  Not that it matters much with most consumers but Wal-Mart seems to carry more made in America products then Target but I have never really investigated.  A couple of other things about Wal-Mart is that their inner city stores are usually dirty and a wreck.  But on the other hand Wal-Mart is more willing to go into bad neighborhoods then Target. 
May 17, 2012 9:46PM

Walmart stock should go up, they now will only hire part time ,no full time associates unless your in management..that way no benefits paid. insurance or 401 yeah way to ca not even transfer if you are a full time associate you only can get part time..


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