Let me first be very clear about one thing: The coronavirus pandemic is no Great Recession of 2008-09. While it is already wreaking havoc on what just a few months ago appeared to be a resurgent global economy, the financial situation in 2008-09 was driven by structural issues and excess within the economy itself.
While COVID-19 is exposing that there are financial issues -- soaring corporate and government debt, global supply chain fragility, and inequality that means the masses remain underprepared for times of crisis -- the spread of the infectious disease is an external disruptor versus an internal systemic one.
But enough of the existential, let's talk brass tacks. While the situation is different now, the old financial crisis investor playbook can still be dusted off and searched through for potential strategies related to the current situation. One of those strategies that worked well for myself and others who rode out the last severe downturn was investing in big box stores, namely Walmart (WMT 0.86%), and to a lesser extent Target (TGT 0.81%). Walmart stock in particular massively outperformed the stock market downturn in 2008-09 and helped investors return to making money quicker than the market overall did.
Interestingly, something similar is playing out right now. And Target, I believe, is in better shape to weather a downturn than ever before.
But why not e-commerce?
Amazon (AMZN 3.15%) has gotten plenty of attention as well, and rightly so. It's highly profitable Amazon Web Services (AWS) division will likely continue to benefit as the world gets pushed further down the road of digital -- even after the dust settles. The retail segment will likely see a surge in revenue too since so many households are confined to their homes.
However, while retail is the largest segment at Amazon as far as revenue goes (AWS was only 12% of the total in 2019), it is barely profitable. AWS, on the other hand, comprised two-thirds of operating income. Plus, while Amazon's retail business could surge, some of its third-party sellers -- especially those that focus on non-essential retail sales -- could struggle. And Amazon's retail skewing toward basic household goods doesn't equate to more profitability either. While Amazon is certainly a stock that investors may want to consider right now, I still think investing for the retail segment is missing the point.
Circling back to the tried-and-true
This brings our conversation back to Walmart and Target. The two big-box stores have made great strides in recent years ramping up their own e-commerce capabilities, and all the while have remained profitable doing so. Margins, as is the case with most retailing, are thin, but the sheer size of Walmart and Target means net income is still robust.
In fact, the coronavirus crisis could mark a turning point in both companies' e-commerce journey. Walmart, in particular, hasn't seen overwhelming success in its digital ventures, at least when it comes to running a profit, and it reportedly lost some $1 billion last year on between $21 billion to $22 billion in online sales. However, its grocery division has been picking up steam, and the ability to order online and schedule a pickup time could gain a big boost thanks to the pandemic. As scale is likely the roadblock to generating positive cash, picking up a ton of new customers amid self-quarantine orders bodes well for the big-box store.
While Target doesn't boast the same grocery business as Walmart, it too has nonetheless made great strides in its e-commerce department. Digital sales grew 29% in 2019, accounting for the bulk of the company's 3.4% surge in comparable store sales (a blend of foot traffic and ticket size). The shift in focus a few years ago has had a negative effect on profits, but as seen in the aforementioned chart, Target is also beginning to realize an uptick in the bottom-line as its digital efforts start to bear fruit.
While I invested in Walmart on the expectation that consumers will start searching for bargains and clamping down on budgets, I think Target could also benefit from a similar shift in consumer behavior. Plus, while Walmart stock has held up and pushed to new all-time highs since coronavirus took control of the world, Target stock has fallen 25%. I'm betting on a quick rebound there as it's likely the company continues to benefit from higher traffic.
While this is no financial crisis of 2008-09, I think the ultimate results will be similar and big-box store stocks will outperform the market overall. For investors looking for some safety net for the next year, Walmart and Target are worth a look.