Heading into the all-important holiday shopping season, retailers are battling for dominance while dealing with skyrocketing costs. In this piece, we compared two leading big-box retailers in the U.S. Target (NYSE:TGT) and Walmart (NYSE:WMT) have been facing off for decades. While Walmart is significantly larger than Target in terms of sales, some critical distinctions have led to wildly different outlooks from these two firms. As a result, investors have gobbled up shares of Walmart since its latest earnings report while remaining neutral on Target. However, the reactions to both retailers could be overdone.
Target (TGT)
Unfortunately, most of the distinctions between Target and Walmart are negative for Target. However, Target’s average shopper tends to have a higher income than Walmart’s typical shopper. Additionally, Target is trading at a lower P/E multiple than Walmart, suggesting that this latest sell-off could be overdone. Thus, a bullish view seems appropriate.
About 20% of Target’s sales are groceries, which is good news amid the growing concerns about a recession. The big-box retailer is recession resistant to some extent, although perhaps not as much as Walmart.
Due to the widespread economic slowdown, Target executives slashed their forecast for the company’s holiday quarter after its third-quarter comparable-store sales rose 2.7% year-over-year for the third quarter. While Target shoppers tend to have higher incomes, which boosted its sales during the pandemic, the retailer’s customers tend to shop less regularly and focus more on impulse buys, which is likely to be a problem during a recession.
From a valuation standpoint, Target just looked undervalued compared to Walmart despite the negative distinctions versus its largest competitor. Target is trading at a trailing P/E multiple of around 21x, which seems a bit low. It’s clear that Target is in a weaker position than Walmart, but the May sell-off looks overdone. Target has yet to recover even partially from that sell-off.
What is the Price Target for TGT stock?
Target has a Moderate Buy consensus rating based on 15 Buys, seven Holds, and zero Sell ratings assigned over the last three months. At $175.86, the average price target for Target implies upside potential of 11.4%.
Walmart (WMT)
On the other hand, most of the distinctions between Target and Walmart are positive for Walmart. However, the company is trading at a P/E multiple that’s more than double that of Target. Thus, it looks like Walmart could be overvalued after skyrocketing following its most recent earnings report. Still, Walmart has historically recorded solid performances during past recessions, which suggests a neutral view may be appropriate.
There’s no denying that Walmart is recession-resistant, given its focus on consumer staples. In fact, more than half of Walmart’s sales are groceries, making it a mainstay in consumers’ wallets during a recession, especially with its long-running mantra of “everyday low prices.”
Walmart reported an 8.2% year-over-year increase in comparable-store sales, emphasizing its strength during these troubled economic times. Additionally, Walmart executives boosted their outlook for the year, unlike Target executives.
However, the big-box retailer is currently trading at a trailing P/E multiple is around 46.7x. While Walmart deserves a premium compared to Target due to its relative strength in this weakening economic environment, the price discrepancy between these two retailers looks too large.
What is the Price Target for WMT stock?
Walmart has a Strong Buy consensus rating based on 20 Buys, four Holds, and zero Sell ratings assigned over the last three months. At $162.83, the average price target for Walmart implies upside potential of 7.3%.
Conclusion: Bullish on Target, Neutral on Walmart
While Walmart could be overvalued over the long term, there’s no denying that it’s in a strong position during the current economic downturn, while Target’s positioning leaves much to be desired. For this reason, Walmart deserves a premium versus Target, but investors shouldn’t overlook what Target’s low valuation has to offer.
Ultimately, fair value for Walmart and Target looks to be somewhere between the former’s P/E of 46.7x and the latter’s P/E of 21x, with Walmart deserving a premium relative to Target. However, it could take some time for share prices to normalize.
