Walmart Stock Outperforms Target

Discount Model Proves to be Winner With Consumers, Investors
Shopping carts in the parking lot of a Walmart store
Shopping carts in the parking lot of a Walmart store in Rohnert Park, Calif. (Justin Sullivan/Getty Images via Bloomberg News)

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Walmart Inc. shares are far outshining those of Target Corp. and other retail peers, as Wall Street anticipates the shopping behemoth’s broad array of household necessities will offer more shelter from slowing economic growth.

One year after both firms shocked Wall Street by slashing profit projections in the face of swelling inventories, Walmart’s stock has proven the sure winner among investors. Its shares have climbed about 22% in the past 12 months, adding some $67 billion of market capitalization — almost the same as Target’s entire market value. In the same period, Target is down about 6%, while the 87-member S&P Retail Select Industry Index has dropped almost 5%.

The stunning outperformance drives home that Walmart’s discount model and its strength in areas like groceries set it apart with consumers curbing discretionary spending as concern builds that a recession is ahead.

“You want to stick with Walmart here, especially in the environment we’re in at the moment,” Telsey Advisory Group analyst Joseph Feldman said on Bloomberg Television on May 18 after the company boosted its profit outlook. “In tougher times, Walmart tends to shine.”

Chart comparing Walmart stock performance to Target

Retailers have been under pressure since last year, when consumers began shifting spending to necessities amid a soaring rate of inflation. That worked against Target and other retailers that primarily sell discretionary goods, like furniture, apparel and electronics. On May 19, Foot Locker Inc. provided the latest evidence that consumers are pulling back, cutting its financial projections for the year amid slowing sales trends.

Goldman Sachs Group Inc. analyst Kate McShane has buy ratings on both Walmart and Target, but she prefers Walmart against the current economic backdrop given its relatively defensive profile. Walmart gets more of its sales from groceries, and it’s positioned to benefit as shoppers trade down from costlier retail peers, she said.

In their most recent fiscal years, food and other household essentials made up nearly 60% of Walmart’s U.S. sales, compared to less than half of Target’s, their financial statements show.

At Baird, analyst Peter Benedict highlights Walmart’s progress in scaling revenue streams including advertising and its online marketplace — businesses with higher operating margins. He has an outperform rating on the stock.

Walmart has 36 buy, 11 hold and zero sell recommendations among analysts tracked by Bloomberg, giving it a higher ratio of bullish ratings than Target.

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Valuation is one sticking point for some on Wall Street when it comes to Walmart, although not enough of a stumbling block to spur calls to sell. The stock trades at about 23 times projected earnings, exceeding the five-year average and well above Target’s roughly 17 times.

“While we are bullish on Walmart’s growing momentum and are looking for an opportunity to become more constructive on the stock, its valuation still gives us pause,” Truist Securities Inc. analyst Scot Ciccarelli wrote in a note to clients, reiterating his hold rating.

Walmart Inc. ranks No. 2 on the Transport Topics Top 100 list of the largest private carriers in North America.

— With assistance from Jonathan Roeder.