The back-to-school season in 2023 is marked by shifting financial priorities among parents due to inflation and higher prices. While overall spending has decreased, back-to-school shopping is expected to reach record levels this year.
In this article, I have evaluated prominent grocery stocks, Target Corporation (TGT) and Walmart Inc. (WMT), to determine which could be a better buy. After thoroughly evaluating these stocks, I think WMT is a superior choice to TGT for the reasons discussed in this article.
The pandemic resulted in the emergence of consumer polarization, where some consumers scaled up to purchase expensive products. The global food & grocery retail market is expected to grow at a CAGR of 3% until 2030.
Furthermore, Back-to-school spending is expected to reach an unparalleled $41.5 billion, up from $36.9 billion last year and the previous high of $37.1 billion in 2021.
Additionally, the supermarket and hypermarket segment are expected to hold the largest market share in the grocery retail market due to several factors, including their established presence, wide product range, and ability to offer competitive prices.
TGT has declined 24.3% over the past nine months compared to WMT’s 6.7% gain. Also, TGT has declined 15.1% year-to-date compared to WMT’s 14.7% gain.
Here are the reasons why I think WMT might perform better in the near term:
Recent Developments
On August 10, 2023, TGT announced its fall designer collection with Rowing Blazers, a brand known for redefining classic American style by mixing on-trend designs with timeless influences.
The limited-time only collection boasts more than 100 colorful pieces and spans adult and kids' apparel, accessories, home, outdoor play, and pet products, offering high-quality style at affordable prices. Items start at $5, with most pieces under $30, and the collection will be available beginning Saturday, September 23, on Target.com and in select Target stores, while supplies last.
Conversely, on July 26, 2023, WMT and PepsiCo announced a seven-year collaboration to pursue $120 million worth of investments focused on supporting U.S. and Canadian farmers in their pursuit to improve soil health and water quality.
By establishing and scaling financial, agronomic, and social programs, it aims to enable and accelerate the adoption of regenerative agriculture practices on more than 2 million acres of farmland and deliver approximately 4 million metric tons of greenhouse gas (GHG) emission reductions and removals by 2030 – roughly equivalent to the amount of electricity needed to power 778,300 homes for one year1.
Moreover, on June 27, WMT announced it had extended its partnership with Genpact Ltd (G) to continue to support its North American finance and accounting operations.
Recent Financial Results
TGT’s total revenue for the fiscal second quarter that ended July 31, 2023, declined 4.9% year-over-year to $24.77 billion. However, its net earnings rose 356.5% year-over-year to $835 million. Its EPS increased 357.6% year-over-year to $1.80.
On the contrary, during the second quarter that ended July 31, 2023, WMT’s net revenues increased 5.7% year-over-year to $161.63 billion. The consolidated net income attributable to WMT increased by 53.3% year-over-year to $7.89 billion, while the company’s adjusted EPS increased by 4% year-over-year to $1.84.
Past And Expected Financial Performance
TGT’s revenue has increased at a CAGR of 8.5% over the past three years. Its revenue is expected to decline 1.8% this year and 4.6% in the third quarter ending October 2023. However, its EPS is expected to gain 26.1% this year decline 3.6% in the current quarter ending October 2023.
Conversely, WMT’s revenue grew at a 5.2% CAGR over the past three years. Analysts expect WMT’s revenue to increase by 5.3% this year and 4.4% in the third quarter ending October 2023. Its EPS is expected to gain 2.7% this year and marginally in the current quarter ending October 2023.
Valuation
TGT’s forward EV/EBITDA multiple of 9.88 is lower than WMT’s 12.79. Additionally, TGT’s forward EV/Sales multiple of 0.71x is lower than WMT’s 0.77x.
Thus, TGT is more affordable.
Profitability
TGT's trailing-12-month levered FCF margin of negative 0.01% is lower than WMT’s 2.97%. In addition, TGT’s trailing-12-month ROTC of 10.08% is lower than WMT’s 10.68%.
Thus, WMT is more profitable.
POWR Ratings
TGT has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, WMT has an overall rating of A, translating to a Strong Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. TGT has a C grade for Stability, which is justified by its 24-month beta of 1.17. On the other hand, WMT has an A grade for Stability, which aligns with its 24-month beta of 0.65.
Moreover, TGT has a C grade for Growth in sync with its mixed growth in the last reported quarter. In contrast, WMT has a B grade for Growth, which aligns with its promising growth.
Among the 38 stocks in the A-rated Grocery/Big Box Retailers industry, TGT is ranked #28, while WMT is ranked #2.
Beyond what we’ve stated above, we have also rated both stocks for Sentiment, Momentum, Value, and Quality. Get all TGT ratings here. Click here to view WMT ratings.
The Winner
Changes in lifestyle, quality of life, industrialization, rapid urbanization, and an increase in demand for quality food and grocery products are some of the factors driving the growth of the Food and Grocery Retail market. Industry players such as TGT and WMT are well-positioned to benefit from these industry tailwinds.
However, WMT's stability and promising growth prospects make it a better choice than TGT for September.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Grocery/Big Box Retailers here.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
WMT shares were trading at $160.92 per share on Friday morning, down $1.69 (-1.04%). Year-to-date, WMT has gained 14.80%, versus a 18.75% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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