Retail stocks are having a tough year. That's because consumer spending patterns have slowed in 2023, especially around discretionary purchases like home furnishings and electronics. The shift caught many companies by surprise, leading to inventory overhang and profit margin pressures.
But these businesses are adjusting well to the new realities in the market. In fact, both Target (TGT 0.18%) and Walmart (WMT -0.08%) in mid-November announced solid third-quarter sales growth trends. Their management teams sounded cautiously optimistic heading into the holiday shopping crush, too.
Both retailers are likely to emerge stronger from this latest cyclical downturn, but which stock is a better choice for your portfolio? Let's compare.
Getting to growth
The stocks' reactions to the latest earnings updates showed how different investors' growth expectations were for Target and Walmart. Target shares jumped after the company reported declining comparable-store sales (comps) in its fiscal third quarter, which ended Oct. 28. Walmart stock, on the other hand, dropped following its solid sales increase in its fiscal 2024's third quarter, ended Oct. 27.
Walmart is on a far better sales trajectory. Comps were up 5% in the U.S. market last quarter compared to Target's 5% decline. Customer traffic was up 3.4%, too, while Target endured a painful 4% drop. The difference seems to be Target's weaker position as a value-focused retailer. The company is aiming to address that challenge over the holidays by offering thousands of gifts priced under $25. But in this economy, shoppers seem to prefer Walmart when they're looking to stretch their spending dollars.
Profit margin rebound
One good reason to feel optimistic about Target's business is its rebounding profit margin. Management has been focused on reducing inventory for several quarters, and that strategy is paying off in spades. Operating profit margin jumped to 5% of sales in Q3, up from 1% a year ago. Walmart's comparable figure is holding steady at about 3.5% of sales.
Target is aiming to get its profitability back to the level that the company enjoyed before the pandemic. Its operating margin moved above 6% of sales to 8% of sales during the high-spending days of the pandemic, but that rate was clearly unsustainable. Still, it's good news for shareholders that Target is on a rebound path even in this weak selling environment.
Cash and outlook
Both retailers are entering the holiday shopping period with ample cash and light inventory levels. That means the risks are low that investors will be met with an unwelcome surprise in their holiday season sales updates or in the chains' fiscal fourth-quarter announcements early next year.
Target pays a much more generous yield of 3.4% compared to Walmart's 1.5%. Yet Walmart will appeal to most investors as the better long-term holding from here. The chain has already demonstrated its appeal to shoppers in a slowing sales growth environment. Management just hiked its 2023 sales outlook for a second straight quarter, too. Walmart is on track to boost margins slightly even as it maintains its price leadership position this year.
Target will be back. The retailer has thrived through many previous downturns, after all, as evidenced by its over 50-year track record of consecutive dividend increases. Patient investors might enjoy being along for that rebound process over the next few quarters. But Walmart stock carries less risk today, and in a volatile market that stability is extremely valuable.
