Walmart and Target: The Best of the Retail Stock Plays?

• Walmart and Target remain well-positioned to gain from strong holiday sales
• Expansion of convenient shopping options likely to drive sales for Walmart and Target

We believe Walmart (WMT) and Target (TGT) stock could be the best retail bets during this holiday season. Early holiday sales forecasts indicate that 2019 could end on a higher note for retailers. Deloitte forecasts 4.5%–5% YoY growth in 2019 holiday retail sales.

Meanwhile, AlixPartners projects an increase of 4.4%–5.3% in retail sales from November to January period. Coresight Research expects a 3.5%–4.0% increase in US retail sales this holiday season.

As outlook remains strong, we believe the convenience of shopping and fast delivery could be the key sales drivers for retailers. Notably, both Walmart and Target have excelled in those drivers and have significantly expanded their fulfillment options.

Both Walmart and Target have been focusing on merchandise and have added popular brands, which could drive traffic. Also, their value pricing could be a significant factor in their success.

Supporting this upbeat outlook are the favorable macroeconomic factors, which bode well for retailers. High employment rates, higher wages, and lower taxes are expected to boost consumer spending, benefiting retailers.

Costco (COST) is another retailer that could benefit from investments in pricing. Costco’s investment in price continues to attract value-driven shoppers in a heightened competitive environment. Notably, Costco’s comparable sales have grown at a robust rate in the last several quarters and have outpaced peers. While we believe Costco could gain from sustained momentum in its sales, its high valuation could limit the upside in its stock.

Walmart stock has risen 27.1% since the start of the year. Moreover, Walmart stock could gain further during the holiday season on the back of its digital business. Walmart’s robust digital business has been the key growth driver for its comps as well as its stock price. Walmart’s comps in the domestic market have increased for 20 straight quarters, with its digital business acting as the key contributor behind this growth.

Walmart offered grocery pickup services in 2,700 stores at the end of the second quarter. Moreover, the retailer plans to expand this service, which could drive its comps and its stock. Also, Walmart’s same-day grocery delivery services were available in 1,100 stores at the end of the second quarter. Walmart is planning to expand this service to 1,600 stores by the end of the year.

In addition to expanding its digital fulfillment options, Walmart has added more than 2,000 new brands to its website since April last year.

We believe that convenient shopping options, expanded merchandise, and value pricing could drive Walmart’s comps in the coming quarters. Plus, weak margins could pose challenges. However, the comps growth rate could drive Walmart stock in the coming months.

We believe Target’s digital transformation could support its comps and, in turn, its stock in coming quarters. Target’s comps have marked exceptional growth in the recent past on the back of expanded digital fulfillment options. Plus, popular brands and competitive pricing could further support its traffic and growth.

Target’s same-day fulfillment services (including Shipt, Drive Up, and order pickup) have been driving its comps. We believe that its same-day fulfillment services could provide an edge to Target over its peers this holiday season.

Notably, Target stock has increased by 62.6% year-to-date through September 24. However, its stock could have further upside. Target stock trades at a forward earnings multiple of 16.6x, which is significantly below the peer group average of 21.1x.

Also, Target stock is trading at 9.1x its next-12-month enterprise-value-to-EBITDA multiple, which is lower than the peer average of 12.1x.

Target’s valuation gap with its peers and robust comps growth could drive its stock further. Target expects its comps to increase 3.4% in the second half of 2019. This projection looks strong as Target faces tough comparisons in that period. 

Notably, the majority of analysts covering Walmart and Target stock maintain their “buy” ratings.