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Why Target Is Outperforming Walmart and Costco

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TGT’s performance

Shares of Target Corporation (TGT) are up 21.4% on a YTD (year-to-date) basis as of March 29 and have generated better returns than both Walmart (WMT) and Costco (COST). Shares of Costco and Walmart are up 18.9% and 4.7%, respectively.

The stock prices of these big-box retailers are gaining from sustained momentum in their comps led by growth in their traffic and ticket sizes. Expanded digital fulfillment options, expanded assortments, and value pricing are driving traffic for these retailers despite heightened competition from Amazon (AMZN) and other deep discounters, including Aldi and Lidl.

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Target stock has gained the most so far this year, reflecting stellar holiday sales and a low valuation. Also, Target stock offers a higher dividend yield than Walmart and Costco. Target stock is trading at a forward PE multiple of 13.7x, nearly 54% lower than Costco’s forward PE multiple of 29.8x and 33% lower than Walmart’s forward PE multiple of 20.5x.

Meanwhile, Target’s current dividend yield is ~3.2%. In comparison, Walmart stock has a dividend yield of 2.2%, and Costco offers a dividend yield of ~1%.

Outlook

We expect Target to continue to drive traffic and, in turn, its comps in the coming quarters. Meanwhile, improved comps, lower interest expenses, and share buybacks are expected to drive its earnings. However, Target’s margins are expected to remain weak in the near term, reflecting an adverse mix and higher online fulfillment costs. Tough year-over-year comparisons and lower margins could restrict its EPS growth rate to the mid-single digits, which could, in turn, limit its upside.

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