Target vs. Wal-Mart vs. Amazon: A Tricky Investment Situation

You will likely be surprised by what has already taken place, and you should know what’s going to happen.

Jul 14, 2014 at 6:34PM
Amazon

CoolDailyInfoGraphics.com

 Is is possible that Target (NYSE:TGT) will deliver more profitable growth than Wal-Mart Stores (NYSE:WMT) and Amazon.com (NASDAQ:AMZN) in the future? This might sound like a crazy question, but since margin and bottom-line growth are the real keys to long-term success and shareholder wealth, this possibility must be investigated.  

Recent results and what they really mean
Target's first quarter traffic and sales improved over the fourth quarter when the data breach occurred. In the fourth quarter, U.S. comps sales (sales at stores open at least one year) declined 2.5%. In the first quarter, U.S. comps sales slipped just 0.3%. This isn't a positive number, but it was on the high end of guidance: flat to down 2%.

Since Wall Street cares more about direction than anything else, this is seen by many as a win. You have to ask yourself why that comps number improved so much and came in on the high end of guidance, though. The answer? Promotions.

Promotions equal contracting margins and reduced profits. First-quarter EBITDA (earnings before interest, taxes, depreciation, and amortization) came in at 9.5%, down almost one percentage point from the year-ago quarter. 

Target had no choice but to increase promotions in order to get its customers back into its stores. This was good news for traffic and sales, but bad news for margins. It's the future that matters though. 

Looking backward and forward
What you're about to read is something most investors don't realize about Wal-Mart and Amazon. Amazon is the no. 1 online retailer in the world by sales and traffic, and its revenue growth has outpaced Target's and Wal-Mart's by heaps over the past five years: 

AMZN Revenue (TTM) Chart

AMZN Revenue (TTM) data by YCharts

You probably already had an idea about this trend. What you might not know, however, is that over the past three years, the stock appreciations for these three companies have been as follows: Wal-Mart (55.22%), Target (35.06%), Amazon (61.38%). 

Notice that Wal-Mart's stock has appreciated almost as much as Amazon's over a three-year time frame. How can that be? Savvy investors love consistently profitable companies. Look at the EBITDA margins below and notice that only one of these three companies has delivered consistently:

WMT EBITDA Margin (Annual) Chart

WMT EBITDA Margin (Annual) data by YCharts

Target has suffered from its Canadian operations, the data breach, and a hesitant consumer. It has many promotional and digital initiatives to help restart the engine, but success would take a long lime to come by given the fact that promotional sales don't help margins.

Amazon recently increased its annual Amazon Prime membership fee to $99 from $79. If it can maintain its top-line growth while improving its margins, then you have a home run. However, this has yet to be determined. 

Wal-Mart is the only company of the three that has managed to deliver consistency on the top line and with its EBITDA margin over the years. This is despite reduced government benefits for the low-income consumer and thanks to good upper management that knows how to cut excess costs and maximize potential. 

Add the fact that Wal-Mart currently offers a dividend yield of 2.5% and the Wal-Mart vs. Amazon investment debate becomes a lot more difficult than you might have imagined earlier. Target currently yields 3.6%, which is generous, but Target's margins are declining. 

Now let's look ahead. Consider EBITDA margin estimates for the current and next two fiscal years for these three large retailers:

WMT EBITDA Margin Estimates for Current and Next 2 Fiscal Years Chart

WMT EBITDA Margin Estimates for Current and Next 2 Fiscal Years data by YCharts

At first glance, Target might look the most appealing. Look closer, though, and you will notice that's actually a contraction while Wal-Mart and Amazon will be expanding their margins. However, looking two years ahead for any metric is like guesswork. You're actually better off basing your investment decisions on past (and consistent) trends, which could be an indication of management capabilities. 

The Foolish conclusion
Target might be showing traffic and sales improvements, but they come at a steep price. Keep Target on your radar and consider getting on board if it begins to show margin improvements. Until then, Wal-Mart and Amazon should continue to offer better investment options -- Wal-Mart for the slow-and-steady investor, and Amazon for the risk-taker. 

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

 

Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers