Where can I invest some money: Target or Wal-Mart?


Overview

Wal-Mart

Wal-Mart Stores, Inc. (NYSE: WMT), branded as Wal-Mart since 2008 and Wal*Mart before then, is an American multinational retailer corporation that runs chains of large discount department stores and warehouse stores. The company is the world’s 18th largest public corporation, according to the Forbes Global 2000 list, and the largest public corporation when ranked by revenue.

It is also the biggest private employer in the world with over two million employees, and is the largest retailer in the world. Wal-Mart remains a family owned business, as the company is controlled by the Walton family who own a 48% stake in Wal-Mart.

The company was founded by Sam Walton in 1962, incorporated on October 31, 1969, and publicly traded on the New York Stock Exchange in 1972. It is headquartered in Bentonville, Arkansas. Wal-Mart is also the largest grocery retailer in the United States. In 2009, it generated 51% of its US$258 billion sales in the U.S. from grocery business. It also owns and operates the Sam’s Club retail warehouses in North America.

Wal-Mart has 8,500 stores in 15 countries, under 55 different names.The company operates under the Wal-Mart name in the United States, including the 50 states and Puerto Rico. It operates in Mexico as Walmex, in the United Kingdom as Asda, in Japan as Seiyu, and in India as Best Price.

Wal-Mart Stores, Inc. operates retail stores, restaurants, discount stores, supermarkets, supercenters, hypermarkets, warehouse clubs, apparel stores, Sam’s Clubs, and neighborhood markets, as well as the websites walmart.com; and samsclub.com.

Wal-Mart’s operations are organized into three divisions: Wal-Mart Stores U.S., Sam’s Club, and Wal-Mart International. The company does business in nine different retail formats: supercenters, food and drugs, general merchandise stores, bodegas (small markets), cash and carry stores, membership warehouse clubs, apparel stores, soft discount stores and restaurants.

Wal-Mart also operates banks that focus on consumer lending; and provides financial services and products, including money orders, wire transfers, check cashing, and bill payment.

The company operates about 10,231 retail units under 69 different banners in 27 countries, including the United States and Puerto Rico, as well as Africa, Argentina, Brazil, Canada, Chile, China, India, Japan, Mexico, and the United Kingdom.

Target

Target Corporation, doing business as Target, is an American retailing company headquartered in Minneapolis, Minnesota. It is the second-largest discount retailer in the United States, behind Wal-Mart. The company is ranked at number 33 on the Fortune 500 as of 2010 and is a component of the S&P 500 index.

Its bull’s-eye trademark is licensed to Wesfarmers, owners of the separate Target Australia chain which is unrelated to Target Corporation.

The company was founded in 1902 in Minneapolis as the Dayton Dry Goods Company, though its first Target store was opened in 1962 in nearby Roseville, Minnesota. Target grew and eventually became the largest division of Dayton Hudson Corporation, culminating in the company being renamed as Target Corporation in August 2000. On January 13, 2011, Target announced its expansion into Canada.

Target will operate 100 to 150 stores in Canada by 2013, through its purchase of leaseholds from the Canadian chain Zellers.

Vulnerabilities

Wal-Mart:

Just controlling such a huge organization is a huge undertaking and in particular managing the employees. Suppliers are always under pressure with regard to price and their ability to supply when required. Because of the low prices customers often question and are concerned at the quality of the goods. This is offset to some extent by the satisfaction guarantees offered.

Local competing vendors hate the possible arrival of Wal-Mart and a lot opposition is likely. Also competition from local convenience stores is likely to increase as travel costs to Wal-Mart increase. Also in Europe, the expansion of the German retailers, Aldi and Lidl, is growing fast. These companies offer limited stock but are local and are cheap. ALDI is like the “Southwest Airlines” of the grocery business, with efficiency being the name of the game with only 1000 or so stock items against the normal 20,000 to 30,000 items in Wal-Mart.

Although Wal-Mart is huge, competition from similar companies is also likely. Being successful, they are open to attack on any ethical stance – low pay and poor work conditions, supply of goods from ‘poor’ cheap labor countries, and environmental issues.

Wal-Mart depends heavily on China for manufacturing its merchandise as it purchases billions of dollars worth of merchandise every year. Additionally, many of the company’s suppliers like Mattel (MAT) manufacture their products in China, which in turn are sold in Wal-Mart stores. Wal-Mart’s imports are substantial. By outsourcing to China, Wal-Mart is able to secure lower costs of inventory, which the company in turn passes on to low prices for customers.

However, as a result of its dependency on Chinese manufacturing, Wal-Mart is vulnerable to fluctuations in the value of the dollar compared to the Chinese Yuan. If, for example, the dollar weakens compared to the Yuan, the price of Wal-Mart’s Chinese imports would rise. As a result, the company would either have to raise its prices or would have to cope with narrowed gross margins, reducing its profitability. Additionally, the company is vulnerable to adverse legislation, such as higher tariffs, that would raise the cost of its Chinese imports.

Target:

Target has carved out a niche for itself as a “cheap chic” retailer. In January 2011, Target took its first step in expanding outside of the US with the purchase of 220 Zellers stores in Canada. Target plans to convert 100 to 150 of these stores by 2013 or 2014, with revenues similar to those of its US counterparts. Target also started REDcard promotions with its credit card program, which could increase its revenues. However, rising commodity prices may offset these gains.

Target does not have as many stores as their competitor Wal-Mart. Even with Target’s great advertising, it makes it difficult for the consumers to shop here when there are not that many stores around. Besides, although their prices are low, they just are not as low as Wal-Mart’s prices. As a matter of fact, compared to Wal-Mart’s prices, Target may even seem expensive.

Another problem with Target is that they keep a low overhead of items, so they run out of items very often. Target also focuses a lot on self service so it can be difficult to find what you are looking for sometimes. The threat number one for Target is Wal-Mart. Despite the fact that they are the number one retailer in the world, they also have very low prices. Kmart also proves a threat to Target just because they are beginning to focus more on women’s apparel.

Financial Trends affecting Wal-Mart and Target

Many experts have found three main trends working against retail stores. According to those theories, Wal-Mart and Target are losing shoppers and both are falling behind in the digital revolution. Finally, there are too many people out there relishing Wal-Mart’s failures. These stores have to wake up and reposition themselves properly.

Stressed-out consumers: The most popular theory behind Wal-Mart’s decline is that the same people who traded down to Wal-Mart during the darkest recessionary stretches in late 2008 and early 2009 are now simply trading back up to more “chic cheap” discounters or traditional department stores. Wal-Mart is now leaning on its longtime customers, and that is a dicey proposition when economic uncertainty and sky-high unemployment rates are thinning out what little discretionary income they previously had.

The trend is real, but it does not explain away all of Wal-Mart’s problems. After all, are we to assume that same-store sales will spike higher if we dive back into a recession.

Weak navigation of the digital divide: Some people do not want to be seen at a Wal-Mart; and apparently a lot of people don’t want to be seen at walmart.com, either.

Wal-Mart announced a major organizational restructuring of its online operations. But things clearly are not going too well in cyberspace, even though Wal-Mart’s penchant for low prices should sell well when shoppers do not have to navigate through massive parking lots and huge superstores to save a few pennies at the slow-moving register.

Truth is, Wal-Mart, despite being the world’s highest-grossing retailer, is lagging behind several bricks-and-mortar chains, including office supply specialists Staples (SPLS) and Office Depot (ODP), in e-commerce. Top of Form

Wal-Mart is not doing itself any favors on that front.

In fact, after eight years of selling music downloads, walmart.com is shutting down its MP3 store. The digital convergence of traditional media is here. Teens are downloading music, movies, games, and novels, and it is eating into the physical sale of CDs, DVDs, video games, and books. No one understands why Wal-Mart would turn its back on the one musical format that is growing while its stores continue to stock cobweb-collecting boring CDs.

Now the question is how will Wal-Mart ever become an online retailing force when its digital offerings are about to become woefully incomplete.

Haters: Unfortunately, a lot of people want to see Wal-Mart fail. They hate the way the corporate giant shakes out the operators. Anybody can actually appreciate Wal-Mart’s frenetic inventory turns that create the opportunity for low and honest markups on items. If people save money at Wal-Mart, the money saved will likely work its way back into the community by being spent locally. Wal-Mart has never had a problem getting its value message out there. Customers just don’t care.

It was selling MP3s for less than iTunes, but apparently that did not matter to ear bud-donning e-shoppers. Target (TGT) gets slapped with the “cheap chic” label, but it wears it with pride. Now, here is an easy experiment. Post “I’m going to Target” on Facebook and favorable responses will trickle in. Let’s get serious: ask yourself when was the last time you saw someone bragging about going to Wal-Mart through Facebook or Twitter.

The closest thing Wal-Mart had to being cool was in 2008 when it put out exclusive The Eagles and AC/DC CDs. It could have aimed younger — or at least timely — but at least it was able to get recording legends to commit to the discounter.

How the stock will perform in the future

Wal-Mart reached the top of the Fortune 500 in 2001, becoming the largest corporation in the United States, and has stayed there every year since except 2006. But what makes investors really smile is that Wal-Mart is still expanding, offering the opportunity for growth in share values.

Investing in Wal-Mart stock is a smart choice for several reasons. It appears to offer a good return, with a solid PE ratio and a good but not excessive dividend. Management seems to know what it is doing, and Wal-Mart seems to be positioning itself to be an efficient and successful company worldwide. Wal-Mart seems to promise a good return partly because its valuation is reasonable.

Unfortunately, Wal-Mart’s been accused of bribing officials in Mexico to grow its business.  But by and large, few in America seem to care.  The stock fell only modestly from its highs for one week, and then, the stock recovered from the drop off to the lows of February. Looks like Wal-Mart is trying to defend and extend a horribly outdated industrial strategy.

I suggest Target, a stock that I think will hold its ground even in a double dip recession coupled with inflation, and will really take off if the economy stages a recovery. Target management is aware of customers’ cash flow problems, and has rolled out the RED card credit card initiative, which gave customers a 5% discount for shopping at Target, to huge success. Target also has a very low cost base, owning most of its stores outright and therefore not having to pay leases. These factors have led to Target staying in the black throughout the recession despite poorer profitability. I believe that Target’s customers have already retrenched all that they can, and that sales at Target have reached their nadir.

Target has yet to saturate its core domestic market. Wal-Mart has some 3000-4000 stores in the US, while Target has a relatively paltry 1750 stores. Management expects that an expansion to 2500-3000 stores is reasonable in the US market. Target is expected to sell its receivables to a financial company in the future, a step which should bring in cash for its current expansion, as well as clear up any misgivings about the valuation by bringing in an independent set of eyes. This will also turn TGT into a pure play retailer once again, which would make it easier to analyze for retail analysts.

Financial Ratio Analysis

Gross profit margin ratio: also known as gross margin is the ratio of gross margin expressed as a percentage of sales. It is a measure of the efficiency of a company using its raw materials and labor during the production process. The value of gross profit margin varies from company and industry. The higher the profit margin, the more efficient a company is. Target has 30.9% and Wal-Mart 26.7%.

Again, the higher the profit margin the better off the business, the profit margin is an extremely useful measure of how your business is performing over time. At a glance, you can see whether your business’s net profit has increased, stayed the same, or decreased over last year. And if it is decreased, you will know to take steps to cure the problem, such as better controlling your expenses.

Current Ratio: The current ratio is an excellent diagnostic tool as it measures whether or not your business has enough resources to pay its bills over the next 12 months. A current ratio of over 1 is good news, generally, although if you are comparing your current ratio from year to year and it seems abnormally high, you may have problems with collecting accounts receivable or be carrying too much inventory. On this area, Wal-Mart shows 0.8 while Target shows a healthy 1.3.

Quick Ratio: This is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio is, the better the position of the company. The numbers say: Wal-Mart 0.2 and Target 0.5.

The quick ratio is more conservative than the current ratio, a more well-known liquidity measure, because it excludes inventory from current assets. Inventory is excluded because some companies have difficulty turning their inventory into cash.

Asset turnover: This ratio measures a firm’s efficiency at using its assets in generating sales or revenue, the higher the number the better. It also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover. Here, Wal-Mart is doing better with a 2.4 versus a Target’s 1.6.

Return on Assets: An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company’s annual earnings by its total assets, ROA is displayed as a percentage.

The assets of the company are comprised of both debt and equity. Both of these types of financing are used to fund the operations of the company. The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment. Wal-Mart got an 8.5% while Target 6.4%.

Recommendations

Based on figures, we will notice that Wal-Mart has a much higher receivables turnover than Target, which is because it keeps a very low balance of receivables as a percentage of assets. Thus, we are not focused with the actual number here; the more important part is the trend. Wal-Mart’s receivables turnover has gone down each year since 2007.

Despite Wal-Mart sales up about 20% over that time, the firm has taken on about 70% more receivables, which is why the number seems to have gotten much worse. Target, on the other hand, has steadily improved its receivables turnover since 2008. When looking at the inventory number, Target and Wal-Mart have gone in opposite directions. Target’s number went down for two years and then has rebounded, while Wal-Mart’s went up for two years and has decreased since. Wal-Mart’s higher number means that it is getting more inventory pushed through the system, but if the trend continues, Target will be catching up.

Wal-Mart has a higher number for all three turnover ratios, but the recent trend has been better for Target, despite the lower numbers. Looking at these numbers, we must remember that Wal-Mart has much higher sales and a larger asset base, so they sometimes have more flexibility to get things done. However, you must also look at the trend, and Target has the advantage there.

Overall, both companies are quite solid. Wal-Mart has a bunch of higher numbers, but Target has been doing better as of late in certain respects. Both of these names are quality investments, and would add a nice piece to any portfolio.

References

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About fpolom

Bachelor of Business Administration from Strayer University in Rockville, Maryland,
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