Why Credit Suisse Favors Target Over Walmart

Investors that want some exposure to mega-cap department stores have a few options at their disposal, most notably Target Corporation (NYSE: TGT) and Walmart Inc (NYSE: WMT). The choice betweent the two is clear, according to Credit Suisse: Target.

The Analyst

Credit Suisse's Seth Sigman initiated coverage of Target's stock with an Outperform rating and $86 price target. The analyst initiated coverage of Walmart's stock with a Neutral rating and $102 price target.

Target A 'Survivor'

2017 was a "catch-up" year for Target as management focused on accelerating strategic changes and investments that position the company for stronger comps in the near-term, Sigman said in the initiation note. (See the analyst's track record here.)

Some of these initiatives include a focus on the online channel, investments in price, remodels, a focus on food, exclusive brands and benefits from competitors such as Toys R Us. 

Comps are historically the "key driver" of Target stock, and Credit Suisse projects they will grow 2 percent in 2018, above the 1.5-percent consensus estimate. Target should show a slight improvement in its 2018 EBITDA and may improve even more once the company laps incremental investments in price and wages, Sigman said. 

There are some near-term concerns in Target's business model, including gross margin pressures as online growth accelerates and rising freight costs, the analyst said. However, Target's stock is trading at a discount valuation versus some of its peers, so any near and medium-term concerns are incorporated into its price, he said. 

Related Link: Baird Upgrades Target, Says Retailer Has Positive Catalysts In Shipt, Store Remodels

Walmart: A Murky EBIT Picture 

Unlike Target, 2017 was a "breakout year" for Walmart's stock, marking an end to a difficult stretch from 2013 to 2016, Sigman said in the initiation note. Walmart is further along in the investment cycle than Target, and the department store giant's investments in both the online and offline channel generated sustainable sales momentum, the analyst said. 

Walmart should deliver 2.5-percent comps growth in both fiscal 2019 and 2020, as it is well-positioned to expand beyond its core customer base through new channels and partnerships like Lord & Taylor, Sigman said. But EBIT growth, which is even more important to Walmart's investment profile, is less clear, he said. 

Walmart's continued investments in price and other initiatives are expected to limit any EBIT improvements in fiscal 2019, and this is evident in the company's guidance, Sigman said.  Any benefits from recent tax reform will merely offset the company's already planned step-up in investments, he said. 

Walmart's stock is trading at a "balanced" risk-reward profile ,and investors may want to wait to see signs for online growth re-acceleration and operating profit dollar growth before becoming constructive on the stock, according to Credit Suisse. 

Price Action

Target shares were up more than 2 percent at the time of publication Monday afternoon, while Walmart was up 0.19 percent. 

Related Link:

Walmart's EBIT Dilemma, And Why It Could Weigh On Shares Moving Forward

Photo by Mike Kalasnik/Wikimedia.