Regardless of economic cycles, the grocery industry enjoys an inelastic demand, creating a resilient investment appeal. Given their lower susceptibility to inflation and instability and the benefit from the ongoing holiday season, Target Corporation (TGT) and Walmart Inc. (WMT) could be solid additions to one’s 2024 portfolio.
Before diving deeper into the fundamentals of these stocks, let’s discuss what’s shaping the industry’s prospects.
In November 2023, total U.S. retail sales increased by 0.77% from the previous month and 4.24% year-over-year, driven by robust consumer spending amid lower inflation and a strong job market. It is noteworthy that the Consumer Price Index (CPI) reported a 0.1% increase in November, marking a 3.1% rise from the previous year.
According to a Coresight Research report, the U.S. grocery sector is expected to grow by 5.6% in 2023, reaching $1.50 trillion. This expansion is expected to be driven by factors including lower inflation, the rise of non-traditional grocery retailers, and increased consumer spending, particularly during holiday periods with significant discounts.
According to Statista, a growing number of Americans are turning to online platforms for groceries, with online sales anticipated to make up 13.5% of the total grocery market in 2023.
Furthermore, the grocery industry is transforming. The anticipated rise in online holiday sales highlights Americans' growing preference for online shopping. The online grocery market is expected to reach $3.39 trillion by 2033, exhibiting a robust CAGR of 24.6%.
Considering these conducive trends, let’s take a look at the fundamentals of the two Grocery/Big Box Retailers stock picks, starting with the second choice.
Stock #2: Target Corporation (TGT)
TGT operates as a general merchandise retailer in the United States. It offers apparel for women, men, boys, girls, toddlers, infants, and newborns, as well as jewelry, accessories, and shoes; beauty and personal care, baby gear, cleaning, paper products, and pet supplies.
On December 14, 2023, TGT announced an expansion of Target-themed toys, including collaborations with brands like Hasbro, Barbie, and Hot Wheels. New items include The Game of Life: Target Edition, Skipper’s First Job Target Doll, Bullseye Pop-Up Book, and more, offering a fun and creative shopping experience just in time for the holidays.
On December 12, 2023, TGT announced extended holiday hours, offering stress-free and fun last-minute shopping options, including Drive Up, Order Pickup, and same-day delivery with Shipt, available until Christmas Eve. The retailer also introduced new last-minute deals, gift ideas, and exclusive items, catering to diverse preferences and ensuring a joyful and seamless shopping experience.
In terms of the trailing-12-month Capex/Sales, TGT’s 4.82% is 49.4% higher than the 3.23% industry average. Its 30.87% trailing-12-month Return on Common Equity is 164.3% higher than the 11.68% industry average. Moreover, its 1.91x trailing-12-month asset turnover ratio is 128.9% higher than the industry average of 0.84x.
TGT’s sales for the third second quarter ended October 28, 2023, came in at $25 billion. However, its operating income rose 28.9% year-over-year to $1.32 billion. Its net earnings rose 36.4% year-over-year to $971 million. In addition, its EPS increased 35.5% year-over-year to $2.10.
Street expects TGT’s EPS and revenue for the quarter ending January 31, 2024, to increase 27.1% and 1.4% year-over-year to $2.40 and $31.82 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past three months, the stock has gained 25.3% to close the last trading session at $141.03.
TGT’s POWR Ratings reflect a positive outlook. It has an overall B rating that translates to a Buy in our proprietary system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Value, Momentum, and Sentiment. It is ranked #22 out of 38 stocks in the A-rated Grocery/Big Box Retailers industry. To access TGT’s ratings for Growth, Stability, and Quality, click here.
Stock #1: Walmart Inc. (WMT)
WMT engages in the operation of retail, wholesale, and other units worldwide. The company operates through three segments: Walmart U.S., Walmart International, and Sam's Club. It operates supercenters, supermarkets, hypermarkets, warehouse clubs, cash and carry stores, discount stores, membership-only warehouse clubs, e-commerce websites, and mobile commerce applications.
On December 12, 2023, WMT’s Sam's Club introduced its Sam’s Club Member Access Platform (MAP) with full-funnel video ads onsite, in-app, and offsite. The platform includes Connected TV (CTV) ads, Sponsored Videos, and Interactive Videos, enhancing advertiser engagement with Sam’s Club members by utilizing first-party data for measurable results in a brand-safe environment.
On December 5, 2023, WMT announced the launch of Karün, its first eyewear brand made from traceable recycled materials, including fishing nets, metals, and plastics from Patagonia's coasts. The collection, available at 1,400 WMT’s Vision Center locations, emphasizes sustainability and affordability, aligning with WMT’s commitment to offering more eco-friendly product options for customers.
In terms of the trailing-12-month Return on Common Equity, WMT’s 21.48% is 83.9% higher than the 11.68% industry average. Its 10.66% trailing-12-month Return on Total Capital is 54.1% higher than the 6.92% industry average. Likewise, its 2.52x trailing-12-month asset turnover ratio is 201.8% higher than the industry average of 0.84x.
WMT’s revenue for the fiscal third quarter ended October 31, 2023, increased 5.2% year-over-year to $169.80 billion. Its operating income rose 130.1% over the prior-year quarter to $6.20 billion. Moreover, the company’s net income came in at $453 million and $0.17 per share, compared to a net loss of $1.79 billion and $0.66 per share in the year-ago quarter, respectively.
Analysts expect WMT’s revenue for the quarter ending January 31, 2024, to increase 3.9% year-over-year to $169.15 billion. Likewise, its EPS for the quarter ending April 30, 2024, is expected to increase 8.8% year-over-year to $1.60. Over the past nine months, the stock has gained 12.11% to close the last trading session at $156.41.
It’s no surprise that WMT has an overall rating of B, which translates to a Buy in our proprietary POWR Ratings system.
It has a B grade for Momentum and Stability. Within the Grocery/Big Box Retailers industry, it is ranked #19. To see WMT’s Growth, Value, Sentiment, and Quality ratings, click here.
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WMT shares rose $0.30 (+0.19%) in premarket trading Wednesday. Year-to-date, WMT has gained 11.99%, versus a 26.27% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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