Wal-Mart Vs. Target: Where The Real Difference Lies

Many years ago, I held a position as a retail store manager. I can state unequivocally that retail managers dread the thought of a Wal-Mart (WMT) opening nearby. Oh, if you run an upscale boutique, you don't mind. A Wal-Mart can pull in extra foot traffic. But if you are a retail store manager running a typical retail store, a new Wal-Mart nearby is the equivalent of a 19th century tuberculosis diagnosis.

Doctor: (With a sad but determined look on his face.) Sir, I don't know any other way of saying this other than coming right out and stating the facts…you have Walmartitis!

Patient: But, Doc, there must be some mistake.

Doctor: Sorry, but the tests don't lie. (The doctor hands a clipboard with test results to the patient.) Look. Foot traffic is down…store sales are dropping in almost every category. I'm afraid it's just a matter of time.

Patient: But Doc, isn't there anything we can do?

Doctor: Well, there are a few things that can slow the progression of the disease. But in the end…

I often read articles comparing Wal-Mart to Target (TGT). When perusing reader's responses, I invariably observe the claim that the two stores aren't really competing for the same customers. While I agree there are distinct differences between the two, I have to note that much of the merchandise on the shelves of a Target store can be found within a Wal-Mart.

Even though all of my buddies shop at Wal-Mart, I never seem to see "regular" folks there. I always imagine my friends at home, sipping their morning coffee and leafing through Macy's (M) and Coach (COH) ads, which they promptly throw into the trash as they head out their door to buy cheap crap at Wal-Mart.

I have a personal preference for shopping at Target over Wal-Mart. One consideration is that I no longer work as a retail manager. For over twenty years now, I've had a career in law enforcement. Whether I'm on the good side of town or the not-so-nice side of town, the customers in Wal-Mart seem to be several degrees scruffier than those in Target.

Before I walk into Wal-Mart, I slip my hand beneath my jacket and move the safety off my concealed weapon. I feel as if a crook, and there are plenty of crooks that hold a grudge against me, might sneak up and bang me over the head with kitchenware he smuggled beneath his shirt with the original intent of claiming a five-finger discount.

Despite my security concerns and preference for Target's "shopping experience," I seem to find myself back in Wal-Mart, again and again. I'll wake up on a Saturday and scribble a shopping list: One gallon of milk, a half-dozen bananas, a box of eight penny nails, a bottle of herbicide, some rawhide chews to keep my hounds occupied, a towel rack for our never-ending bathroom remodel and a flat screen TV to install in the kitchen (so I can watch Cramer while making a sandwich).

Now I can go to Albertson's for the milk, Lowe's (LOW) for the nails, PetSmart (PETM) for the rawhide chews, Bed Bath & Beyond (BBBY) for the towel rack and Best Buy (BBY) for the TV, or make another trip to Wal-Mart.

So once again, I find myself in the parking lot of my local Wal-Mart, approximately two football fields away from the entrance. I give Excalibur a pat (that's the nickname I have for my handgun), scan the parking lot for evildoers, remind my wife to help me maintain a 360 degree security perimeter, calibrate my GPS so as to be able to navigate through the cavernous store, ensure we have enough bottled water for the expedition, and begin the trek.

Many investors are understandably concerned that a market correction could be on the near horizon. If you are among that group, Wal-Mart, priced at 78.08 (fair value range of 72.32 to 83.00), has a comforting beta of .52. While Target's beta of .57 is comparable, its current stock price of 62.36 per share (fair value range of 65.66 to 71.50) provides a little more correction cushion. However, as we'll see as this article progresses, there could be a solid foundation for the market's current pricing of Target.

Wal-Mart and Target share a similar and enviable history of increased dividends and share buybacks. Below is a side-by-side comparison covering the previous ten years.

$ AMOUNT OF DIVIDENDS

	03	04	05	06	07	08	09	10	11	12
WMT	.30	.38	.52	.60	.67	.88	.95	1.09	1.21	1.45
TGT	.24	.26	.30	.36	.44	.52	.60	.66	.83	1.10

DIVIDEND EXPRESSED AS %

	03	04	05	06	07	08	09	10	11	12
WMT	.65	.78	1.25	1.45	1.55	1.69	1.86	2.07	2.07	2.13
TGT	.69	.55	.59	.68	.94	1.60	1.30	1.12	1.64	1.85

Wal-Mart has a current dividend of .47 per quarter with a 2.41% yield. Target sports a quarterly payment of .43 with a 2.76% yield. Its payout ratios over the trailing four quarters are 34.5% and 43.4% respectively. Below is a comparison of the two companies' stock buyback programs. Wal-Mart's numbers are expressed in billions, Target's in millions.

NUMBER OF SHARES REMAINING

	03	04	05	06	07	08	09	10	11	12
WMT	4.45	4.37	4.27	4.19	4.17	4.07	3.95	3.88	3.67	3.47
TGT	914	917.1	912.1	889.2	868.6	850.8	773.6	754.8	729.4	683.9

Current buyback programs should result in a reduction of 4% in Target's shares outstanding and a reduction in Wal-Mart's shares of 3% in FY 14 and 3% in FY 15. Now let us take a snapshot of the two companies' growth rates and fundamentals.

Wal-Mart Target

1 year EPS growth	5 year EPS growth	1 year EPS growth	5 year EPS growth
3.77%	9.6%	3.27%	8.6%

Wal-Mart (TTM) Target

NET	ROA	ROE	ROI	NET	ROA	ROE	ROI
3.77	8.61	23.33	14.32	3.27	5.03	14.84	7.34

Wal-Mart Target

5 year sales growth	EPS growth (TTM/TTM)	5 year sales growth	EPS growth (TTM/TTM)
4.47%	6.67%	2.96%	-17.42%

Now we're beginning to see a difference in the two companies. Target's current underperformance vis-à-vis Wal-Mart's is in large part caused by its recent foray into Canada. Target's latest 10Q results from its Canadian operations reflect an EBIT loss of 612 million in the nine months ending November 2nd. Target's troubles in Canada have led analysts to forecast a $1.00 drop in FY 14 EPS.

On a Canadian sourced article concerning Target's difficulties in Canada, I found comments by readers worth perusing.

Contrast Wal-Mart's presence in Canada and other foreign locations. As of January of this year, Wal-Mart had 5,946 stores in ten countries (379 in Canada) and another 642 in Central America. Wal-Mart's most persistent problem in expanding into other nation's markets seems to be relatively minor losses associated with foreign currency exchange.

Wal-Mart's results in foreign markets underscore an important strength not yet evidenced in Target's operations. If it is to continue to grow at rates required by prudent investors, the size of these two retail behemoths requires expansion into areas outside the United States, as well as new initiatives.

An investor must question whether Target can turn its Canadian venture into an operation worthy of the Target name. Should Target fail in this mission, one must believe large scale expansion of its retail business will be greatly curtailed.

Meanwhile, Wal-Mart appears to moving ahead successfully with its new Wal-Mart Express stores and online business. On Black Thursday, Wal-Mart had 400,000,000 page views on its website and garnered a total of one billion web page views between that Thursday and the following Monday. Wal-Mart executives predict 10 billion in internet sales in 2013 and forecast 20 billion in 2014.

In contrast, Target waited until 2011 to launch its online website. When pressed by the SEC to release internet sales results, Target stated, "digital sales represent an immaterial amount of total sales."

In conclusion, it is my personal belief that Target is correctly priced by the market. (The fair value estimate ranges listed in this article are garnered from a variety of sources considered reliable by the investment community. I simply list the highest and lowest I find.) If you disagree with my assessment and consider Target's difficulties in Canada to be a hiccup, then now may be a good time to consider Target as an investment.

Lest fans of Target believe I am unfairly pummeling their favorite company, I would like to say that I consider it generally very well run. Should it move beyond its current problems, I would be eager to consider including it as a solid part of my portfolio; however, I am prone to waiting until it emerges from its Canadian difficulties before I consider investing in the stock. I might also add that Target's technicals appear rather dismal, at the moment.

In my estimation, Target's problems serve to highlight the strength of the nimble 500 pound retail gorilla we know as Wal-Mart.

Source: Wal-Mart Vs. Target: Where The Real Difference Lies

Disclosure: I am long WMT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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