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Walmart (WMT) and Target (TGT) released fantastic second quarter earnings reports this week, and Barron’s had noted prior to the reports that Target was most likely to get a big boost from its bottom line. That’s how it turned out, with Target stock jumping 12% on Wednesday afternoon, while Walmart posted losses after its Tuesday report.
Cowen & Co. analyst Oliver Chen, who spoke about Target’s potential last week, wrote that “the company’s tremendous growth and agile execution [drove] an unprecedented increase ”during the quarter. He was optimistic about the company’s ability to attract and retain new customers while “successfully combining stores, digital inventory and delivery execution.”
The main difference between the Target and Walmart quarters was the pace of recent sales. Walmart’s same-store sales in July were up just 4%, less than half of the second-quarter total, and the company warned that lower stimulus controls would weigh on spending. In contrast, Target appeared optimistic about its ability to continue to make significant revenue gains.
This discrepancy is corroborated by foot traffic data, as tracked by Placer.ai, a data and analytics company. While Walmart and Target saw a sharp drop in same-store sales in April, during the thickness of the foreclosure measures and after panic buying in March, Target recovered faster. Target visits fell from a 32.1% year-over-year decline in April to just 2.1% in May, and stayed around that level in June and July. However, as Walmart returned to a 7.8% year-over-year drop in traffic in May after dropping 19.7% in April, it again recorded double-digit declines in June. and in July.
Revenue and traffic weren’t the only areas where Target shone. The company added 10 million digital customers in the first half of the year, during which time it also captured $ 5 billion in market share. Its total same-store sales and e-commerce growth were higher than Walmart’s, albeit on a smaller basis.
Of course, the streets always have their eyes on the future, which will make some investors wonder how long the good times can last for Target. Granted, the stock may put some of Wednesday’s double-digit pop back into the short term, and there may be concerns that this will only raise the bar for future quarters.
No one expects Target, or any other essential retailer, to keep up with the breakneck pace experienced this year. From panic buying to stimulus checks, there has been no shortage of extraordinary catalysts to fuel sales, and these will eventually diminish. The question is whether these companies can retain the customers they acquired during the Covid-19 crisis, which will mitigate the descent and position them for growth.
Judging by that metric, there is reason to be bullish on Target even after Wednesday’s rally. Without a vaccine or an effective short-term treatment, there is little reason to believe that recent consumption habits will change, and these have greatly benefited the biggest players in the distribution sector. With a few exceptions, consumers have consolidated their travel, which means one-stop shops like Target are taking over their smaller competitors.
In addition, a 700% increase in the number of steering wheel controls shows that Target’s omnichannel approach is resonating with consumers. Even as more and more shopping has moved online, a large network of physical stores remains a key asset, a benefit of Target over Amazon.com (AMZN).
“With Target’s market cap at $ 77 billion and Amazon’s market cap at $ 1.6 trillion, Target is trading at 1 times sales and Amazon is trading at 5 times sales,” said Abhay Deshpande, founder by Centerstone Investors. “There are far too many people on the other side of the boat.”
Likewise, Gordon Haskett analyst Chuck Grom believes the “monster” results show that the gap between the multiples of Target and Walmart is also unjustified and he sees it narrowing in the coming months. “This development, along with the high probability that Street’s estimates are significantly underestimated, should lead to [Target] well beyond recent peaks.
That said, there is room for more than one winner, and that bodes well for Walmart as well. Even though she sees a decline in sales as the stimulus dries up, she still had a great quarter and benefits from many factors that are helping Target.
Management’s pessimistic tone may have helped reset expectations a bit, and of course, if more government checks came out or unemployment benefits boosted performance, it would help its bottom line.
Indeed, it could win both ways. The continued delay in the new stimulus, or a smaller stimulus this time around, could help Walmart refocus consumers’ priorities on value, noted Christopher Mandeville, analyst at Jefferies. “As such, we remain confident that Walmart can grow its share over the long term. Reduced store hours and stockouts have also hurt sales, both of which are back to normalized levels. “
Even Chen de Cowen, who pointed out Target’s better earnings position, is bullish on both stocks. “In the short term, we believe Walmart is well positioned to compete in an uncertain consumer environment, while in the long term, we expect Walmart to increase its market share in grocery stores and other categories.”
The target ended up 13% to $ 155.28 on Wednesday, while Walmart was down 1.7% to $ 132.41. The Dow Jones Industrial Average closed 0.3% lower. Walmart is off 0.4% in pre-market commerce Thursday, while Target is up 0.6%.
Write to Teresa Rivas at [email protected]
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