After Target’s Q4 numbers, I’ll stick with Walmart Stock

From a distance, the two retailers look similar enough. In general, most things you can buy at one place can be bought at another. Goal‘S (TGT -1.15%) However, the recently reported fourth quarter numbers remind us why Walmart (WMT -0.35%) is the better investment of the two options at this time.

Target’s Q4 numbers leave much to be desired

By the way, the market largely disagrees with my argument. Target shares rose 12% on Tuesday after reporting fourth-quarter results.

The company handily beat earnings expectations of $2.42 per share by posting earnings of $2.98, well above the $1.89 per share comparison a year ago. Margins were also better. Target also unveiled several new growth initiatives, including a subscription-based same-day delivery program. Expectations for the budget year that started in February are also in line with estimates.

Now take a closer look at the numbers. Although “comparable sales and traffic trends improved sequentially for the second quarter in a row,” they only improved because they fewer bad. Same-store sales were still down 5.4% during the three-month period ending in January, and that was with an extra week of sales! Total revenue of $31.9 billion rose just 1.7% year over year, with new stores accounting for more than all of that net growth.

Most of Target’s $506 million net income growth came from a $543 million reduction in its cost of goods sold — a benefit the retailer didn’t necessarily create itself. Selling and administrative expenses rose 6.3% from $5.6 billion to $6 billion, exceeding revenue growth by a country mile.

It’s not all bad, to be honest. The company’s biggest headache from just a few quarters ago – way too much inventory – no longer appears to be a costly problem. Inventory levels fell from $13.5 billion a year ago to just $11.9 billion in early February, which didn’t force Target to accept the profit-robbing markdowns it experienced through much of 2023. The company also expects measurable comparable sales growth in 2024.

Walmart’s numbers are simply better

However, none of these numbers can match Walmart’s. Companywide revenue improved 5.7% (4.9% at constant exchange rates) during the comparable holiday quarter. US same-store sales rose 4%. Gross profit grew from 22.9% of sales to 23.3% of sales during the three-month period ending in January, while adjusted earnings per share rose to $1.71 in the final fiscal quarter of 2022 .80 per share this time.

In some ways, these results are better than Target’s. In other ways they are even worse. However, the ways in which they are worse are often more important to retailers. Take sales as an example. If nothing else, selling the goods currently on store shelves frees up space and money to buy more salable goods, even if the margins on the goods going out now are not particularly high.

At the very least, Walmart ensures that inventory flows from its warehouses to the shelves of its stores and then into the hands of customers. It may not make much money anymore, but in the retail world, every cent matters.

The company isn’t spending a ton more money on it either. Although Walmart’s selling and administrative expenses were higher in the quarter ending in January, that 3.8% increase is measurably less than the 5.7% increase in sales. These figures also reflect the figures for the entire year.

The kicker: Walmart expects sales growth of between 3% and 4% this year, roughly doubling Target’s own guidance.

Why Walmart wins

Why is Target struggling to do what Walmart seems to be able to do with ease? There are some arguable reasons. The first of these is consumer perception of Target. The two retailers certainly have similarities. However, they are not the same. Target has successfully branded itself as a place where people can spend their free dollars.

Walmart, on the other hand, remains a place to find value. With ongoing inflation and economic uncertainty weighing on people’s minds right now, more and more people are choosing to visit a Walmart. Walmart has consistently emphasized that most of last year’s market share gains came from households with annual incomes above $100,000. That used to be Target’s bread and butter.

The other reason Walmart wins while Target doesn’t? Mate. Walmart just has more of it, and uses it. With over 5,000 stores in the US alone, compared to Target’s fewer than 2,000 (not to mention the fact that Walmart is also the largest supermarket chain in the US), Walmart has considerably more influence than it is afraid of. to apply.

Early last year, for example, Walmart bluntly told several of its packaged food suppliers that it would no longer stomach price increases, threatening to give its own private label products a more prominent spotlight without cutting prices. It then used its size and internal know-how to help these brands reduce their wholesale costs.

It’s also worth wondering whether Target overreacted to last year’s inventory growth debacle, wiping out so much of it between then and now that it doesn’t have enough of the right goods on its shelves. Never say never.

Not permanently, but until further notice

This difference between these two comparable companies won’t be this pronounced forever. The economy will eventually be on firmer footing, which will favor Target’s discretionary strategy. Walmart will also eventually decline and may become a victim of its own size and complexity.

However, such a shift is not on the short-term radar. Inflation is still above the Federal Reserve’s target levels, and the Fed appears to be losing interest in previously expected rate cuts by mid-year. Meanwhile, layoffs are on the rise again, while credit card debt among US residents reached a record high of $1.13 trillion at the end of 2023, according to Federal Reserve figures. The yield curve also remains inverted.

These aren’t the kinds of challenges that go away in a few weeks. It can take months – if not years – to shake them off. Until that happens, people will think, act and spend money cautiously. Walmart stock remains the better bet in the meantime.

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