With nothing more than a passing glance, discount retailers Walmart (WMT -0.08%) and Target (TGT 0.18%) look similar enough. Both offer a wide assortment of household goods -- including grocery items -- at reasonably low prices. Indeed, the two retailers sell much of the same merchandise. Both companies' stores are also readily accessible by most consumers living in the U.S. So, how different are they really?
The fact is, however, from an investors' point of view, Walmart and Target are plenty different. One is worth owning right now, while the other one isn't.
Walmart's the better buy of the two. Here's why.
3 reasons Walmart stock is the better pick
To be fair, the two companies are more alike than different. They serve the same consumers, often in the same geographic markets. Many of consumers' most-purchased goods can be bought at either venue, usually at very comparable prices.
However, here are three distinguishing factors, in no particular order, working against Target by working in Walmart's favor.
1. The merchandise mix matters
You're not imagining things if you sense a different mix of goods between Walmart and Target. Although there's plenty of product overlap, there's also plenty of uniqueness. Target offers more fashionable apparel, giving rise to its "cheap chic" descriptor that's been used since early this century. Walmart offers more in categories like hardware, jewelry, and car care, to name a few. Most Walmart stores are also grocery stores, too. In fact, Walmart is the United States' biggest grocer, comprising more than half of its U.S. retail revenue (which accounts for the bulk of companywide sales).
This matters, particularly right now.
With inflation now putting pressure even on affluent households, the discretionary purchases once made at Target stores aren't being so readily made any longer. As Target's Chief Growth Officer Christina Hennington conceded during August's Q2 earnings call, "Consumers continue to face difficult choices with every purchase."
This same headwind is blowing against Walmart, to be sure. But it's better positioned to handle it. Consumers prioritize the purchase of groceries, after all, and Walmart is a viable trade-down option for people needing such relief. The retailer even repeatedly said since late last year that most of its recent sales growth is coming from consumers earning more than $100,000 or more per year.
Many of these people may have been regular Target shoppers now looking for better bargains.
2. Walmart's e-commerce platform is becoming a workhorse
Kudos to Target for entering the online fray. The company's e-commerce platform, however, can't hold a candle to Walmart's.
Although Walmart doesn't regularly update these numbers, it's reported in the past that there are hundreds of millions of items listed at Walmart.com at any given time. Most of these listings aren't Walmart's, of course. The retailer opened its website to third-party sellers, making it more akin to Amazon.com. As of the most recent reported tally, over 150,000 unique sellers are utilizing Walmart.com as a sales platform.
Even so, the model is highly advantageous to Walmart itself. Not only does Walmart earn a commission for sales made via Walmart.com, but this selection of goods also draws users to the website and app where the company can collect valuable consumer data. Even if indirectly, the reach of Walmart.com is generating incremental sales growth.
The kicker: Walmart isn't just leveraging its website's and app's traffic to turn shoppers into spenders. It's also monetizing this traffic itself. The company's retail media network, Walmart Connect, allows sellers to pay for ads featuring their listings at Walmart.com.
That makes something CFO John David Rainey said earlier this year considerably more telling. Speaking at an investor conference, he explained, "The more eyeballs that are coming to your digital platforms, the more advertisers want to spend money." He went on to point out that profit margins on this ad revenue can reach as high as 80%. That may be a veiled hint of the company's plans for Walmart.com.
Target's online store just doesn't have this kind of reach or monetization potential.
3. Walmart enjoys dominating scale -- Target doesn't
Last but not least, Walmart is a much more important distributor of brands' merchandise than Target and a much more convenient shopping option for U.S. consumers. This translates into leverage Target just doesn't have.
As of the end of July, 4,616 Walmart stores are operating within the United States; most are supercenters that also sell groceries. That's enormous reach. It's so enormous, in fact, the company reports 90% of U.S. residents live within 10 miles of a Walmart store. Then there's an additional 599 Sam's Club warehouse stores.
For comparison, Target has less than 2,000 stores up and running in the United States, many within easy driving distance of a Walmart locale. If Walmart has more selection and/or a better price on a particular item (which it often does), consumers will choose it over Target.
Perhaps the real leverage, however, is the clout Walmart carries with suppliers of the goods it sells. In November of last year and again in February of this year, the company flatly told vendors it was done paying ever-rising wholesale prices for their goods. Not wanting to jeopardize relations with their single-biggest customer, these manufacturers seemingly listened -- and responded.
Target just doesn't have this kind of muscle.
Not a prediction of Target's doom, but...
None of this is to suggest Target is un-ownable. It will survive. Indeed, once inflation gets back to more normal levels and the economy is humming again, Target will be back in its element. In the meantime, its dividend is protected enough, making its current dividend yield of 4% compelling for interested income-seekers.
So, if you already own it, don't panic.
Until further notice, though, the economic backdrop favors Walmart. The advent of advertising at its e-commerce site only bolsters the bullish case. After all, that's high-margin revenue that doesn't cannibalize any of its existing profit centers.
Of course, these differences are already being reflected in the two stocks' disparate performances of late. Walmart stock is up. Target stock is down. The only question is, how long will these two tickers continue to move in opposite directions?
