Friday, December 29, 2017

UPDATE: Target vs Walmart: Who is YOUR Money On?


12/29/2017-

I love being right.

All retail stocks minus those whose moats totally collapsed (like BBBY) are experiencing some bounce. Christmas season number looking like around +5% YOY. 

Yet Target is catching the attention of The Street, just for the reasons I stated below. Excitement about the other notable players like Walmart and Macy’s tempered, but I see nobody who recommends caution or waiting when it comes to Target. Today on Seeking Alpha:

Bernstein fires off a price target boost on Target (TGT +0.9%) to $75 from $65 after factoring in tax reform benefits and store labor investments.
The firm's PT is out in front of the Street average of $62 and reps 15% upside potential. Shares of Target currently yield 3.83% vs. 2.05% for Walmart and 1.07% for Costco.

Retail stocks to watch or buy in 2018….?

Happy Holidays!

Godzilla vs. King Kong- Amazon playing Godzilla and Walmart playing King Kong. We are all watching the ongoing battle with rapt interest. Walmart has Amazon direct in its sights, trying to be all that in the ecommerce world and even spending advertising money to point out that they have free two-day delivery with no membership fee. And Amazon just keeps on keeping on, evolving into a bigger and perhaps invulnerable force.

With all this attention, you might think that these are the only two retailers in America. Left behind in the news lately is Target. Who? The Minneapolis-based retailer is 5th largest in the US and 10th in the world.

So which retailer is your money on for the future-if you can only buy stock in one of them? I know what you said-Walmart-right? That’s OK. Let’s take a brief and focused look at the two of them and then let me know if your thinking has changed at all. Spoiler alert: My definitive conclusion at the end.

As an investor, I want to look clearly at past history as it may predict future trends-sales, marging, PE, dividends, etc. In this regard, taking the last 5 years as a timeline, Walmart has the edge:

1.     Share Price- Both company’s stock price declined in 2015. Since then Walmart (WMT) has recovered, increasing from $56.42 to $97.11 (12/15/2017). Target reached a high of $84.69 in mid-2015 and closed at $62.61 on 12/15/2017. Advantage: Walmart
2.     Revenue Growth Rate- Neither one has been breaking any records, but Walmart had a modest increase in 2016, while Target declined, due to its decision to close its pharmacy business. Advantage: Walmart. See below chart:



3.     Gross Margin %- Neither company has been growing in this area, mainly due to price panic in retail land. BUT Target’s gross margin % is significantly higher than Walmart. Advantage: Target. See below chart:


4.     Asset Turnover Ratio (how fast goods turn)-  The chart below shows us that Walmart’s is higher than Target’s. But Target’s is growing while Walmart’s is not. Numbers Advantage: Walmart. Trend Advantage: Target.


5.     Earnings Per Share: EPS- You can see from the chart below that this is a wash (Target’s dip from the closing of their Canadian stores): Advantage-None.


6.     Dividend- Despite its tribulations, Target has managed to have a better dividend ratio than Walmart. Advantage: Target:


(Source for all above: “Walmart vs. Target: Survival of the Fittest?,” Ploutos Investing on Seeking Alpha, 9/25/2017, https://seekingalpha.com/article/4109072-wal-mart-vs-target-survival-fittest)

You still awake? This is by no means a throrough financial analysis. If interested, do some more work at the above article and many other statistics available at Seeking Alpha and other web sites.

A couple more statistics before we move on to what is behind them and makes the real difference.

7.     The above report also compares Sales/Square Foot (as of 7/2017). Walmart  $436, Target $290. Since the dawn of time, this has been the bellwether statistic for retailers. The more each square foot pays for itself with sales turnover, the better the health of your store.  This is combined with revenue/employee to give a total health report on your store.

The report and most others say that Target has done a poor job compared to Walmart in advancing its ecommerce business. Granted and this is advantage: Walmart- in the short term.  Longer term, consider this: With the massive size of most Walmart stores, the more business is transferred to online, the less profitable each square foot of store space will be. Conclusion: Walmart has a lot more to lose, and will be a victim of its own success if its online business expands dramatically. No free lunch, it has to come from somewhere.

Target is on point and will have a future advantage in this area due to its move to create SMALLER (wow) stores with its CityTarget program. Where would you even put Walmart in a city. Like King Kong trying to find a seat in Manhattan. And what would a concise Walmart look like?

Both stores have recognized that brick and mortar not only is not dying, it is and always will be a critical part of the mix. People will never stop shopping, just will be more picky about where and how long.

To that end, both stores realize that facilitating customers to shop in store and not have to schlep their goods home is an invaluable service in future. Target has gotten a lot of press for their acquisition of Shipt to offer customers same day delivery of their purchases (don’t get too excited just yet- Shipt has a membership fee and, at least for now, will continue to deliver for other retailers). This acquisition of $550 million acknowledges the critical ongoing role of brick and mortar.

Now let’s get to my favorite topic to compare these two- the Economic Moat. Morningstar rates Walmart a Wide Moat (due to price) and Target as NO Moat.  This means that the barriers to entry for a competitor to take business from Target is much easier than Walmart.

I totally disagree.
Why?

The first and most important reason is Private Label. Target has made an excellent and ongoing effort to develop private brands that would be unique and meaningful to the customer-not just the mass market customer, but the crossover customer as well. They have a serious and credible organization, headed by the talented Michael Alexin, to develop and carry on private label business.  (Read: https://corporate.target.com/article/2012/08/video-michael-alexin-target-as-design-house) Brands such as Cat and Jack (Kids), Merona, Goodfellow (Mens) will earn their validity with product. As I have continued to say, any brand that earns its stripes can win in this market.

Further to this, Target has secured the cooperation of real designer brands such as Marimekko and Mossimo to enhance their product assortment as well as their credibility as an everyone department store, not a mass market destination.
Remember the gross margin chart above? Remember that success as defined by investors is sustainable value creation? Private label is the reason and the best vehicle for this difference; if you have your own design and your own product, you can set your own price (within reason). Result: gross margin.

So what about Walmart? Their entire portfolio of brands is positioned that they can copy name brands at better prices. Not that there’s anything wrong with that. But it sets their image into more stone as a discounter trying to get your money with price deals-not design.

So, back to the Moat- Price is an open battlefield. Costco does and will continue to kill Walmart on price. Now you don’t even have to leave home to get Costco-type deals, courtesy of Boxed.

In the grocery business, private label has become a major battlefield.  First grocers Trader Joe’s/Aldi, as well as Lidl are killing everyone (maybe RIP Kroger) on credible private label goods at an incredible price. Now Costco, ever the smart one, who has always had great credibility for their Kirkland brand, now has gone into the wine and liquor business. Come on folks- a Kirkland Chianti Classico Riserva with the Gallo Nero (DOC) on the label for 6 bucks? 1.75L of Vodka made in the Grey Goose factory for $20? I don’t care who you are- you are trying this one.

IN the food area, Target currently trails Walmart, averaging 15% higher prices on grocery items. BUT if they follow the same trail of establishing credibility as they are doing with their apparel and home brands, that 15% may not matter. Or if they decide to be a category killer like Lidl and Aldi..

Now- please tell me- whose Moat is wider for the future-Target or Walmart?
And please don’t tell me about ecommerce, Jet.com, etc. Sure it matters, but about 90% of business is still brick and mortar.  Walmart is more vulnerable as they have played their chips on price-which, as I have always said, is the easiest area to defeat. Again-unbridled growth of ecommerce at the expense of brick and mortar has a downside, which shows up in two critical retail metrics- $/square foot and $/employee. Who is more vulnerable here?

Finally, I have said and I believe everyone has agreed that brick and mortar shopping today is about the experience. That agree, let’s talk about the shopping experience of walking into a Walmart Superstore-OMG- I don’t care who you are, you are absolutely not considering taking more time to absorb the experience at Walmart. Even Sam’s Club vs. Costco is a totally different experience. I can’t wait to get out of Sam’s and I can’t get myself out of Costco. Key metric of Experience-what tempts you once you are in a store, even if it is something you didn’t come for.

Those who have been tempted by other than price at Walmart, please share your experience.

IF brick and mortar shopping is about experience and value, and Moats are about barriers to entry, Walmart is not in an commanding position and has a lot more to lose. What is more, there is a long road ahead until Walmart becomes and exciting-and simple-shopping experience.

My general observation about Target is that management manages carefully and thoughtfully, and makes the tough decisions when needed. For now, Target passes my bubble test.

As you might have guessed by now-my advantage: Target.



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