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If your products aren’t perceived as cheap, they won’t sell.
That’s the message that shoppers are sending to retailers these days. The most profitable grocers in Canada are the ones who have maximized their discount price offerings.
In the States, Big Box retailer Walmart Inc. (NYSE: WMT) has seen its stock rise 71% year-to-date. That’s a huge jump for a mature company. By contrast, shares of Target Corp. (NYSE: TGT) lost more than 21% after earnings results were released on Nov. 20. For the year, they’re off about 12%.
Target is meant to be a discount store, like Walmart. But on-line price comparisons between the two retailers almost always show that Walmart’s prices are cheaper, especially for groceries. Cheaper food pulls in more customers, who will buy other products while they’re in the store. It’s a virtuous circle for Walmart.
The effects show up in the latest earnings reports from the two companies. It’s like night and day. Walmart sales are booming, and the share price is behaving like it was a tech stock instead of a discount retailer. Target is floundering.
Both stocks are recommendations of my Internet Wealth Builder newsletter. Here’s a look at the latest quarterly results.
Target Corp. (NYSE: TGT) is a Minneapolis-based operator of big box stores, with almost 2,000 outlets in all 50 states and the District of Columbia. The company opened its first store in 1962 and now employs 350,000 people. It attempted to establish a presence in Canada a few years ago, but the initiative failed miserably, and the company pulled out after incurring heavy losses.
The stock had been trading in the $155-$160 range until it fell off a very steep cliff after announcing its third quarter results. The shares are now below the price at which they were originally recommended in 2019.
Third-quarter sales were up 0.3% from last year, well below analysts’ estimates of 1.5%. It would have been worse had not digital sales increased by 10.8%. Total revenue of $25.7 billion was 1.1% higher than last year but operating income of $1.2 billion was 11.2% lower. Operating income margin rate was 4.6% in 2024, compared with 5.2% in 2023. Gross margin rate was 27.2%, down from 27.4% last year.
Net earnings were $854 million ($1.85 per diluted share). That was down about 12% from $971 million ($2.10 per share) last year. The company raised its dividend by 1.8% in August to $1.12 per quarter ($4.48 per year). The stock yields 3.6% at the current price.
CEO Brian Cornell spoke of the having to “navigate through a volatile operating environment during the third quarter.” The fourth quarter doesn’t look much better. Target forecasts flat sales compared with last year’s holiday season, despite already-announced big discounts on a wide range of products.
Target is in a tough spot. Both Walmart and Costco are increasing sales significantly in this environment, while Target is struggling to stay flat. It’s going to be a long haul. Investors holding this stock might consider selling at this point.
Walmart Inc. (NYSE: WMT) is the world’s largest bricks-and-mortar retailer, with 10,500 stores in 24 countries, plus an expanding e-commerce operation. It employs some 2.3 million people worldwide and had revenue in the latest fiscal year of $648 billion.
The stock took a drop in early August but has moved up steadily since and last week touched an all-time high.
In contrast with Target, Walmart’s third-quarter results (to Oct. 31) couldn’t have been sunnier. The company reported a revenue jump of 5.5% to $169.6 billion, led by eCommerce, which was up 27% globally. U.S. sales increased 5.3%. Net income attributed to Walmart was $4.6 billion ($0.57 per diluted share), compared with $453 million ($0.06 per share) the year before.
For the first nine months of the fiscal year, consolidated net income attributable to Walmart was $14.2 billion ($1.75 per share) compared with just over $10 billion ($1.24 per share) in the same period last year. In terms of earnings per share, that’s up 41.1%. The shares currently pay a quarterly dividend of $0.21 ($0.84 a year), to yield just under 1%. The next dividend increase is expected in March.
On Feb. 26 this year, Walmart split its shares 3 for 1. So, for every 100 shares investors had previously owned, they now have 300.
The company raised its guidance for fiscal 2025. Net sales are expected to grow 4.8% to 5.1%. That’s up significantly from the previous forecast growth of 3.75%-4.75%. Adjusted operating income is expected to increase by 8.5% to 9.25% in constant currency. Adjusted earnings per share are expected to be between $2.42 and $2.47.
Consumers are never wrong. Growth investors might consider adding Walmart to their portfolios.
Before investing (or selling), consult to your financial advisor to ensure your move aligns with your risk-tolerance profile and your longer-term portfolio objectives.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.
Follow Gordon Pape on X at X.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.
Notes and Disclaimer
Content © 2024 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.
Image: iStock.com/nicoletaionescu
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