Target (NYSE:TGT) was one of the few large retailers to succeed amid the competition from e-commerce. The threat Amazon.com (NASDAQ:AMZN) presented to the industry had investors questioning whether Target, Walmart (NYSE:WMT), and even Costco (NASDAQ:COST) could succeed in the changing retail environment.
Amid fears that Amazon would take over retail, these stores realized that their brick-and-mortar footprint could give them a competitive advantage if combined with an e-commerce strategy. This strategy propelled a comeback from more traditional retailers.
Of these, one could argue that Target is the most surprising success story. It can't match the size and international footprint of Walmart. Moreover, it lacks a membership program and must stock a wider selection of merchandise than Costco.
Still, despite these challenges, Target stock is in a position to profit retail investors more than its primary rivals. Here's a look at how Target compares with its three principal competitors.
Target vs. Amazon
From a stock perspective, Target and Amazon represent the two extremes among general retailers. Though it has come down over time, Amazon still supports a P/E ratio of just over 83. Target, meanwhile, trades at barely 18 times earnings. Moreover, Amazon chooses to reinvest profits in its business. In contrast, Target boasts 52 years of dividend growth, and its dividend currently yields around 2.3%.
Despite the cheaper cost, Target stock may present investors with a better retail opportunity. It's begun to outpace Amazon in digital sales. In the prior quarter, Target reported year-over-year digital comps growth of 31%. That compares with less than 18% for Amazon.
Amazon will remain a challenge for Target, and the fact that Amazon earns most of its profit outside retail gives its e-commerce operations some breathing room. However, with Target's more extensive physical footprint and lower stock price, both shoppers and investors will probably keep Target on their radar.
Target vs. Walmart
Before Amazon rose to prominence, both Walmart and Target fought for retail supremacy. Each carved out its own niche within the U.S., but Amazon threatened both of them as customers began to buy more online. Today, both companies have succeeded in leveraging an omnichannel advantage to stay competitive against the e-commerce giant.
Still, while they closely resemble each other in strategy and finances, Target comes out as the relatively cheaper investment. Walmart currently trades at a P/E ratio of about 23, significantly higher than Target at about 18. The two companies also have similar dividend philosophies, with Walmart having raised its payout for 45 straight years. However, Walmart's 1.8% yield falls short of Target's 2.3%. Analysts also expect 10.15% in average annual earnings growth for Target over the next five years, while Wall Street predicts a 5.18% average for Walmart.
Walmart's growth should continue, and these longtime rivals will remain so for the foreseeable future. However, with a lower valuation multiple, higher profit growth, and larger dividend payouts, investors have multiple reasons to choose Target stock over that of Walmart.
Target vs. Costco
In many respects, Costco outperforms Target. Costco's membership model has proved popular, with about 90% of members choosing to renew each year. That success also gives Costco the leeway to offer its products at razor-thin margins, something Target can't match.
As a result, Costco stock has risen by more than 47% from year-ago levels. However, the increase has left Costco stock trading at around 37 times earnings. That means its P/E ratio is about double that of Target. But Target stock seems to offer other advantages over that of Costco. While the warehouse retailer has posted 16 straight years of dividend increases, Costco's yield comes in at just over 0.8%, barely one-third as much as Target's.
Furthermore, Target has begun to surge ahead of Costco on earnings growth. Costco has posted consistently robust sales increases in past years, averaging 11.8% annually over the past five years. However, for the next five years, Wall Street analysts expect that rate of increase to slow to 7% per year, well below Target's 10.15% projected yearly increases for the same period.
Costco will continue to pose a challenge to Target. Target's growing lead in sales growth could also prompt changes for Costco. However, with a lower stock price and higher growth and dividends, Target stands out as the current choice for investors.
Paint a bull's-eye on this stock
Target's low P/E, higher dividend, and stronger profit growth make it an excellent choice for investing in generalized retailers. Granted, it is much smaller than the other three companies, it's the only one to operate solely in the United States, and it lacks a membership or a cloud services division that can compensate for lower retail profits. However, like Walmart, Target has successfully leveraged its retail locations and moved into e-commerce to make an omnichannel-driven comeback. Also, despite Wall Street's expectations of higher profit growth for Target than for its rivals, it offers a lower P/E ratio and a higher dividend than any of the others.
The rivalry among these companies should remain vigorous for the foreseeable future. Still, when it comes to investing in one of these companies, Target stock stands out from its rivals.