Most consumers perceive Walmart (NYSE: WMT) and Target (NYSE: TGT) as interchangeable competitors. I understand, given that both are discount retailing behemoths whose product selection overlaps considerably.
But the perception is wrong. The shopping experience is palpably dissimilar. To be sure, both specialize in discount volume selling, but there’s no mistaking a Walmart for a Target. You know when you’re in Walmart store, and you know when you’re in Target.
I suspect many investors view Walmart and Target as interchangeable. This, too, is understandable. Both plug along at a similar pace.
Walmart or Target: By the Numbers
Over the past 10 years, Walmart’s revenue has grown at a 9.7% average annual rate; Target’s has grown at a 10% average annual rate. Walmart’s EPS has grown at a 9.6% average annual rate; Target’s has grown at an 8.4% average annual rate.
Both are exceptional dividend growers: Since 2004, Walmart’s dividend per share has increased at a 16% average annual rate. Target’s has increased 17.6%. As I write, Walmart yields 2.3%, Target yields 2.7%.
With that said, it’s a mistake for investors to perceive Walmart and Target as interchangeable. Yes, both companies have performed similarly for the past decade, but investing is about where you’re going, not where you’ve been.
If we consider where we’re going, I believe Target has more to offer.
Target is big, with 1,921 stores. The vast majority are in the United States. Target’s international operations extend to Canada, which is home to 36 stores. These retail outlets generated $73.8 billion in trailing 12-month revenue.
Target is big, but Walmart is huge. It operates more than 11,000 retail outlets in 27 countries. These outlets generated $474.7 billion in trailing 12-month revenue – nearly 6.5 times what Target’s stores generated.
I’ll admit that Walmart has done a commendable job of keeping the needle moving over the decades, especially in light of its girth. But the larger you are, the more difficult it is to keep the needle moving. On the margin, it will get increasingly difficult.
Walmart has historically been very efficiently run, and it still is. It turned its inventory over an impressive eight times for the fiscal year ended January 2013. In comparison, Target turned its inventory over 6.4 times. Walmart boasts sales-per-square foot of roughly $430 per year. Target’s sales-per-square foot is roughly $300.
Developing trends, though, are what really matter to investors. Walmart turned its inventory over roughly eight times in 2012, but it was turning it over 9.3 times as recently as January 2010. Target turned its inventory over 6.4 times in 2012. It was turning its inventory over 6.3 times in January 2010. As for sales per square foot, Walmart’s about where it was three years ago. Target has improved to $300 from roughly $280.
That said, based on the trailing 12-month P/E multiple, Walmart still appears the better value: Walmart trades at a 15.4 multiple; Target trades at a 17 multiple.
But when you consider next year’s earnings exceptions, Target is more value-priced. Based on the forward P/E multiple, Walmart trades at 14.1 times next year’s EPS estimate for $5.64 a share; Target trades at 12.8 times next year’s EPS estimate of $4.71.
To belabor the obvious, Walmart and Target are exceptional dividend growers and the cream of the retailing crop. But my deciding factor for recommending Target over Walmart is more qualitative than quantitative. It goes back to shopping experience.
I’ve shopped many Walmarts and Targets, and in recent years the shopping experience has been increasingly more satisfying at Target. Target’s stores, in my opinion, are cleaner, more modern, better planned, and better stocked. Target employees are more cheerful and helpful to boot.
This deciding factor I call “eyeballing.” Though frequently overlooked, eyeballing the joint can provide useful information. If you visit enough stores, and come away with similar experiences, your eyes aren’t lying. After eyeballing Target, I like what I see – and I don’t think my eyes are lying.
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