Walmart (WMT 1.02%) and Target (TGT -0.71%) are both considered blue-chip bellwethers of the retail sector. However, both companies have also struggled with supply chain disruptions, inflationary headwinds, and excess inventory levels over the past year. They also faced difficult comparisons to the stimulus-driven acceleration in consumer spending throughout the pandemic.

Yet Walmart and Target have weathered plenty of macroeconomic challenges before. Should investors tune out all the near-term noise and buy one of these retail stocks as a long-term investment?

Shoppers at a Walmart store.

Image source: Walmart.

The differences between Walmart and Target

Walmart and Target might seem similar, but they differ in several ways. Walmart operates its namesake superstores in the U.S. and overseas, but Target's stores are all located in the U.S.

Walmart owns dozens of additional retail banners across 24 countries -- including Flipkart, one of the largest e-commerce marketplaces in India. Walmart generated 16% of its revenue overseas in its latest quarter, most of which came from its three largest markets: Mexico, Canada, and China.

Walmart's Sam's Club also competes against Costco in the membership-based warehouse club market. Target doesn't operate any comparable stores. 

As of their latest quarters, Walmart operated 10,500 stores (across all its banners), while Target operated 1,937 stores. To counter Amazon and other e-commerce giants, both companies fulfill a large portion of their online orders through their brick-and-mortar stores.

Which company is growing faster?

Walmart and Target both held up well during the pandemic because shoppers rushed to their stores to stock up on packaged foods, household products, and other essentials. They both kept most of their stores open throughout the crisis, and their ongoing e-commerce investments paid off as stay-at-home shoppers made more online purchases.

Walmart's revenue rose 7% in fiscal 2021, which ended in January of the calendar year, as its domestic comparable store sales grew 9%. Within that segment, its domestic e-commerce sales surged 79% as Sam Club's comps improved 12%. Its international revenues increased 1%.

In fiscal 2022, Walmart's revenue rose just 2%, as it generated 6% comps growth at its U.S. business and 10% comps growth at Sam's Club. Its domestic e-commerce sales grew 11%, but its international revenues declined 17% (due to some divestments) and partly offset the growth of its other businesses. For the full year, it expects its revenue growth to decelerate slightly to about 5%.

Target's comps grew 19% in 2020, driven by a 7% increase in store-based comps and a 145% jump in digital comps. A lot of its digital growth came from the expansion of its same-day delivery and Drive Up services.

Target's comps rose another 13% in 2021, as its store-based comps rose 11% and its digital comps increased 21%. But this year, Target only expects its revenue to grow by the "low- to mid-single digit range" as it fully laps its tailwinds from the pandemic and stimulus checks from the past two years.

Near-term earnings headwinds

Walmart's adjusted earnings per share (EPS), which excludes its recent divestments, increased 11% in fiscal 2021 and 18% in fiscal 2022. But for fiscal 2022, it expects its adjusted EPS to decline 8% to 10% as it recognizes a higher mix of lower-margin grocery sales (which has been exacerbated by inflation) and it tries to clear out its excess inventories with markdowns.

Target's adjusted EPS grew 47% in 2020 and 44% in 2021, but it now faces many of the same inflationary, supply chain, and inventory headwinds as Walmart. As a result, analysts expect its adjusted earnings to decline 38% this year.

The valuations and dividends

Both big box retailers face similar near-term challenges, but investors seem to favor Walmart over Target because it's better diversified (in terms of banners, geographies, and e-commerce platforms) and it faces a milder post-stimulus slowdown. That's probably why Walmart's stock has only declined about 4% this year as Target's stock tumbled more than 20%.

However, Walmart's stock now trades at 25 times forward earnings and only pays a forward dividend yield of 1.7%. Target's stock trades at just 20 times forward earnings and pays a higher forward yield of 2.5%. Both companies have raised their dividends annually for about half a century.

The winner: Target

I like both of these stocks as long-term investments. But if I had to choose one over the other, I'd pick Target because its business model is simpler, its valuations are lower, and its dividend is higher.