Target Vs. Walmart: Who's Winning The Big Box War?

When it comes to big-box discount stores, Wal-Mart (NYSE: WMT) still dominates the market with its sheer size. But its primary competitor, Target (NYSE: TGT), has been carving out market share with catchy advertising campaigns and hip design partnerships. Beyond size and the occasional sold-out capsule collection, how do Wal-Mart and Target stack up?  

The Elephant in the Room

Wal-Mart Stores Inc (WMT) is the world’s largest retail company with operating 11,718 stores worldwide as of the end of January 31, 2018 — with around 5,000 of those in the United States (including Sam's Club locations). Its main rival, Target Corp (TGT), operates approximately 1,822 stores in the United States. In 2018, Wal-Mart dominated with a retail market share of 26% percent compared to Target’s 1.4 percent. We can have a glance at its balance sheet and market cap to see how huge Wal-Mart is compared to Target. By the financial year ending on June 30, 2018, Wal-Mart’s total assets were $204.5 billion, about five times larger than Target’s comparatively modest $39 billion. In terms of market capitalization, Wal-Mart's $285 billion is more than 6.5 times larger than Target’s $43 billion, as of October 2018,

(Read more How Wal-Mart Makes its Money)

Size Isn’t Everything

Wal-Mart may be a lot bigger than Target, but size isn’t everything. For one, size does not tell how efficiently a company operates. For that, investors should look towards the inventory turnover, asset turnover, and receivables turnover ratios. By comparing these numbers against competitors’ numbers as well as against the retail sector (Wal-Mart, Target, Costco Wholesale Corp (COST), and Dollar General Corporation (DG) are large players in the sector), we can figure out how efficient the business is (for FY 2017):

Both Wal-Mart beat the sector in receivable turnover, but Target lagged behind.  Wal-Mart also has a higher receivable turnover ratio and asset turnover than Target. When we convert the numbers to days, Wal-Mart collects its receivables in 4.1 days whereas Target takes 19.9 days. This 1-day difference is negligible. A short account receivable collection period is typical for the retail sector as proved by these figures. Both companies have lower inventory turnover ratios than the sector. It takes Wal-Mart about 43 days to turn its inventory, whereas Target needs 62 days. The sector needs 49 days on average. Comparing asset turnover, we can conclude that Wal-Mart is highly efficient compared to both Target and the sector because it has a higher asset turnover than the latter two. High asset turnover implies a high level of sales per dollar of total assets.

Wal-Mart also seems to be more efficient in cash generation than the competitor. Wal-Mart generates $0.14 per dollar of asset from operations versus Target which generates $0.11 per dollar of asset. Higher cash-to-total-assets ratio implies a more efficient use of assets and also is an indicator of higher liquidity.

Profitability

In terms of profitability, Target seems to perform better than Wal-Mart and, in some instances, the sector overall. Target beats Wal-Mart in both gross profit margin and net profit margin. This may be in part due to Wal-Mart’s low price guarantee policy under which Wal-Mart promises the lowest possible prices for its products. However, both companies have a below-industry-average net profit margin (for the quarter ending June 30, 2018):

The Bottom Line

Wal-Mart is a retail giant that is at least five times larger than its primary competitor, Target. Wal-Mart also seems more efficient in business operations than Target—this is reflected in its higher inventory and asset turnover, as well as operational dollar generated per dollar of asset. However, when we compare the two from a financial perspective, Target is slightly more profitable than Wal-Mart. Wal-Mart's lower gross profit margin and net profit margin can be explained by its everyday low price strategy which features a low price guarantee policy.

(Read more Costco, Target or Wal-Mart: Which is the Best Bet?)

Disclosures: At the time of this writing, the author did not have holdings in any of the companies mentioned in this article.