From a distance, the two retailers look similar enough. By and large, most things you can buy from one, you can also buy from the other. Target's (TGT 0.18%) recently reported fourth-quarter numbers, however, are a reminder of why Walmart (WMT -0.08%) is the better investment of the two options right now.

Target's Q4 numbers leave something to be desired

The market overwhelmingly disagrees with my argument, by the way. Target shares soared to the tune of 12% on Tuesday following the release of its Q4 results.

The company handily topped earnings estimates of $2.42 per share by posting a profit of $2.98, well up from the year-ago comparison of $1.89 per share. Margins were better too. Target also unveiled several new growth initiatives, including a subscription-based same-day delivery program. Guidance for the fiscal year that began in February is in line with estimates as well.

Now take a closer look at the numbers. Although "comparable sales and traffic trends improved sequentially for the second quarter in a row," they only improved by virtue of being less bad. Same-store sales still slipped 5.4% during the three-month stretch ending in January, and that was with an extra week's worth of selling! Total revenue of $31.9 billion was only up 1.7% year over year, with new stores driving more than all of that net growth.

The biggest piece of Target's net income growth of $506 million came from a $543 million reduction in the costs of goods sold -- a benefit that the retailer didn't necessarily create itself. Its selling and administrative costs grew 6.3% from $5.6 billion to $6 billion, outpacing sales growth by a country mile.

It's not all bad, to be fair. The company's biggest headache from just a few quarters ago -- way too much inventory -- no longer appears to be a costly problem. Inventory levels fell from $13.5 billion a year ago to only $11.9 billion as of the beginning of February, not forcing Target to take the profit-pinching markdowns it suffered for much of 2023. It's also anticipating measurable comparable sales growth in 2024.

Walmart's numbers are just better

None of these numbers, however, hold a candle to Walmart's. Its company-wide revenue improved 5.7% (4.9% on a constant currency basis) during its comparable holiday quarter. Same-store sales in the U.S. were up 4%. Gross profits grew from 22.9% of sales to 23.3% of sales during the three-month stretch ended in January, while adjusted per-share profits moved from $1.71 in the last fiscal quarter of 2022 to $1.80 per share this time around.

In some ways, these results are better than Target's. In other ways, they're worse. The ways in which they're worse, however, tend to be the more important ones for retailers. Take sales as an example. If nothing else, selling the goods currently sitting on store shelves frees up room and money to buy more marketable goods, even if margins on the merchandise going out the door right now aren't particularly high.

At the very least, Walmart is getting inventory from its warehouses onto its stores' shelves and then into customers' hands. It may not be making a whole lot more, but in the world of retailing, every penny is important.

The company isn't spending a ton more money to do it, either. Although Walmart's selling and administrative expenses did edge higher during the quarter ending in January, that 3.8% increase is measurably less than the 5.7% increase in its top line. Those figures are reflective of the full-year numbers too.

The kicker: Walmart is expecting top-line growth of between 3% and 4% this year, roughly doubling Target's own outlook.

Why Walmart wins

Why is Target struggling to do what Walmart seems to be able to do with ease? There are a couple of arguable reasons. The first of these is consumers' perception of Target. The two retailers certainly have their similarities. They're not the same, though. Target has successfully branded itself as a place for people to spend their discretionary dollars.

By contrast, Walmart remains a place to find value. Since lingering inflation and economic uncertainty are weighing on people's minds right now, more of them are opting to visit a Walmart. Indeed, Walmart has consistently highlighted the fact that most of last year's market share gains came from households with annual incomes of more than $100,000. That used to be Target's bread and butter.

The other reason Walmart is winning while Target isn't? Size. Walmart's just got more of it -- and it's using it. With over 5,000 stores in the U.S. alone versus Target's less than 2,000 (not to mention that Walmart is also the U.S.'s biggest grocery store chain), Walmart enjoys considerably more leverage that it's not afraid to apply.

Early last year, for instance, Walmart flatly told several of its packaged-food suppliers it would no longer digest price increases, threatening to more prominently feature its own private-label goods without price relief. Then it used its size and in-house know-how to help these brands lower their wholesale costs.

It's also worth asking whether Target overreacted to last year's inventory growth debacle, culling so much of it between then and now that it doesn't have enough of the right merchandise on its shelves. Never say never.

Not permanently, but until further notice

This divergence between these two similar companies won't be this pronounced forever. The economy will eventually find itself on a firmer footing, favoring Target's discretionary schtick. Walmart will eventually slip as well, perhaps becoming a victim of its own size and complexity.

Such a shift isn't on the near-term radar, however. Inflation rates are still above the Federal Reserve's target levels, and the Fed is seemingly losing interest in previously expected interest rate cuts toward the middle of this year. In the meantime, job layoffs are accelerating again, while credit card debt among U.S. residents stood at a record high of $1.13 trillion as of the end of 2023, according to numbers from the Federal Reserve. The yield curve remains inverted as well.

These aren't the sorts of challenges that simply fade away in a matter of weeks. It could take months -- if not years -- to shrug them off. People will be thinking, acting, and spending cautiously until that happens. Walmart stock remains the better bet in the meantime.