Walmart (WMT -0.65%) and Target (TGT 1.28%) both issued big earnings updates just as the holiday shopping season started to ramp up in mid-November. Retailers are facing differing pressures, though, as consumers shift their spending habits in response to inflation and economic uncertainty.
Walmart raised its full-year outlook following strong demand through late October. But Target was forced to lower short-term growth targets after consumers started pulling back spending in late Q3.
Let's look at whether those latest results make one of the retailers a screaming buy as we head into the industry's biggest selling period.
Winning market share
Both companies are winning market share in 2022. Walmart said in its Nov. 15 release that gains in its grocery and health and wellness categories helped power surprisingly strong Q3 results. Comparable-store sales were up 8%, with a healthy balance between rising prices and higher customer traffic.
Target executives said a day later that the company is winning market share across all of its core merchandise categories. But its growth of 2.7% was much weaker and reflected roughly 1% upticks in both customer traffic and average spending.
Walmart's focus on value and on selling staples like groceries has helped it attract more shoppers in today's inflationary environment. That strong posture allowed management to raise their outlook to call for roughly 6% sales growth this year. Target, meanwhile, had to lower its forecast and now believes comps will fall in the holiday quarter.
Profitability changes
The gap between the two retailers is even more pronounced when it comes to profitability. Target had to slash prices, especially late in Q3 and into the start of Q4, in response to weakening demand trends. Executives said shopping attitudes were, "increasingly impacted by inflation, rising interest rates and economic uncertainty."
TGT Operating Margin (TTM) data by YCharts.
As a result, the company's operating profit margin landed at just 3.9% of sales, far below the nearly 10% rate that investors saw in earlier phases of the pandemic. Walmart cut prices, too, but not as aggressively. Cost cuts and faster growth, meanwhile, helped it maintain stable profitability.
Looking ahead
Target's share-price slump is likely pricing in those divergent operating trends. The stock is down over 20% so far in 2022, while Walmart's shares are up slightly on the year. But investors shouldn't simply choose the relatively cheaper stock today.
Target warned that it had seen a meaningful slowdown in late October and into November. That shift likely means the company hasn't yet done enough to balance inventory levels with demand. The holiday shopping period might be especially hard on its finances. Walmart, in contrast, is in a stronger inventory and growth posture heading toward 2023.
A short-term sales stumble is no reason to abandon Target's stock. But the bigger concern is that the retailer seems stuck in a multiyear profit-margin slump. Operating income has been declining as a percentage of sales for more than a year and is now below the pre-pandemic level of around 6%.
Until we have more clarity about that critical metric, Target stock looks risky, even at today's discounted prices. Walmart seems more attractive, thanks to its stable finances, rising customer traffic, and growing dividend payments.
