Wal-Mart and Target Strike Back

Try to think back to the early 2000's. At that time, Wal-Mart (NYSE: WMT  ) was the dominating force in retail. Some might say it still is today considering that it generates more sales than Amazon (NASDAQ: AMZN  ) on an annual basis. However, investors care about growth more than anything else, and Amazon is growing at a much more rapid rate than Wal-Mart. Then there's Target (NYSE: TGT  ) , which has always been seen as a smaller version of Wal-Mart. It hasn't grown nearly as fast as Amazon, either.

Wal-Mart and Target both have plans to improve their top lines, and these plans have good potential. Let's see what they have in store. 

Big goes small
Wal-Mart is the largest retailer in the world, with 11,000 stores across 26 countries and a market cap of $250 billion. Wal-Mart's stores are known for their sheer size (the majority are 180,000 square feet), where you can spend hours searching for everyday low prices on a broad variety of products. However, the Wal-Mart you know so well might be in the early stages of changing.

Usually when it's reported that a retailer aims to become smaller, this indicates that the company is having trouble with profitability and must divest numerous underperforming locations in order to meet expectations on the bottom line. Wal-Mart's situation is nothing of the sort.

Wal-Mart has no problem with profitability, and it generates a ton of cash -- $23 billion in operating cash flow over the past year to be exact. This allows Wal-Mart to consistently return capital to shareholders via stock buybacks and dividends. Now add some growth potential to the picture and it could once again become one of the best retail investments on the planet, or at least one of the safest.

Over the next 18 months, Wal-Mart plans on opening 200 Neighborhood Market stores, which would bring the Neighborhood Market store total to 500. These stores are much smaller than the average Wal-Mart, ranging from 38,000-40,000 square feet. However, this smaller version of Wal-Mart isn't the big news. An even smaller version of the store is the bigger news, at least in my opinion.

Wal-Mart only has 20 Wal-Mart Express stores at the moment, but according to Wal-Mart, all of them are performing very well. Importantly, they also allow for fast delivery of online orders, which goes back to the Amazon comparisons above. On top of that, Wal-Mart believes that its Wal-Mart Express stores can steal market share from pretty much any type of brick-and-mortar retailer, as the stores will offer very competitive prices for groceries, pharmaceutical items, gasoline, and more. 

Additionally, Wal-Mart plans on expanding its distribution centers, which will lead to lower costs, faster deliveries, and increased competitive capabilities versus Amazon. Wal-Mart already has a presence within five miles of approximately 67% of the U.S. population. With its added distribution centers, Neighborhood Market stores, and Wal-Mart Express stores, it will get even closer.

On-trend with consumer demographics
Target might not be as big as Wal-Mart, but many consumers see its stores as having a cleaner and more pleasant atmosphere. This in itself is a potential growth catalyst. However, the real growth potential comes with the company's geographical expansion. While the big news is Target's expansion into Canada, the company's CityTarget stores also have enormous potential.

If you don't live in or near a city, then you might not even know that CityTarget stores exist, but there are seven of them in operation, two of which opened this year. They can be found in Chicago, Seattle, Los Angeles, and Portland, and they range from 80,000-100,000 square feet in size. It's not likely that all CityTarget stores will be this large in the future. If Target can decrease the size of its stores, then it will have more real estate opportunities in urban areas. 

The big key here is that many people who live in the city don't drive a car. If a consumer doesn't have to drive a car to the store, then they're more likely to be repeat visitors. A walk, jog, bike ride, or bipedal commute to work might include a stop at CityTarget.

Target is also a well-known and trusted name for middle-to-high-end consumer suburbanites. With many of these people moving to cities in order to be closer to their jobs, this leaves a lot of potential for CityTarget stores. This could lead to Target stealing market share from Amazon. Why have a product delivered when you can walk around the corner and pick it up?

Wal-Mart, Target, or Amazon?
Amazon is by far the best growth story here, and that trend should continue as more people continue to shop online. However, Amazon trades at 145 times forward earnings, and it doesn't pay a dividend. Therefore, it's higher risk than Wal-Mart and Target, which trade at just 14 and 13 times forward earnings, respectively. Also, Wal-Mart and Target yield 2.40% and 2.70%, respectively. If you don't mind risk, then Amazon will be your best bet. If you prefer to play it closer to the vest, then Wal-Mart and Target are about on an equal playing field in regard to potential and capital returns to shareholders at the moment.

 

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