Walmart says consumers are resilient, but Target says they are cautious. Here’s why these retail stocks are going in opposite directions.

Walmart (WMT 0.62%) And Target (TGT 2.80%) are two of the largest retailers in the country. But their actions have moved in opposite directions this year. By the end of last week, the former’s valuation had increased by 72%, while the latter’s valuation had fallen by 12%. Although these companies are competitors and offer many similar products, the stocks themselves couldn’t be more different these days.

WMT data by Y Charts

What’s behind their performance hijacking this year, and is the current trend likely to continue?

Two income reports; two completely different stories

Quarterly earnings reports can not only give investors insight into a company’s performance. They can also help justify the numbers and tell a story.

Last week, Walmart released its figures for the period ending October 31 and reported strong results, with sales up 5.5% to $170 billion, driven by strong growth in e-commerce sales by 27%. The company’s chief financial officer, John David Rainey, noted the high level of consistency from consumers, saying “American customers remain resilient.”

That’s in stark contrast to the message investors have heard from rival Target. The retailer also reported earnings last week (its quarter ended Nov. 2), but the results were far less impressive, with revenue of $25.7 billion up just 1. 1% compared to the same period last year. In Target’s case, its CEO highlighted strong traffic numbers but said “consumers continue to spend cautiously, particularly on discretionary items.” The company has also faced supply chain issues due to a recent port strike. Target’s net income fell 12.1% in the quarter to $854 million.

Why is Walmart doing so much better than Target?

Walmart shares continued to recover after strong earnings performance, while Target shares slumped after an uninspiring quarter from the retailer. There are a few things to note to explain the disparity between these two companies.

The big difference is in the product range. While about 60% of Walmart’s revenue comes from groceries and other everyday essentials, it’s discretionary elements which represent a large portion of Target’s total sales. And these days, as consumers look for ways to save due to inflation, demand for discretionary purchases may decline. Additionally, with Walmart seen as the go-to place for essentials, it might make sense for consumers to make infrequent discretionary purchases at its stores (or as part of their online orders) while stocking up on essentials. groceries and other daily purchases. specifically goes to Target.

Another element to consider is logistics. Walmart operates an efficient and highly effective network and can adapt quickly to changing situations. While Target felt the effects of a strike and supply chain issues on its bottom line, Walmart seemed more adaptable and versatile. Walmart’s operating profit increased 8.2% in the quarter and its cost of sales grew at a slower rate than sales (5.1% versus 5.5%). But the opposite was true for Target, where operating profit declined 11.2% and cost of revenue increased 1.2%, a slightly faster pace than revenue growth – 1.1 %.

Given that not only are sales better for Walmart, but overall efficiency also appears to be higher, it’s no wonder this peak is being reached. retail stock performed much better than its rival.

Is Walmart still the better buy than Target?

Walmart’s performance this year has been exceptional, but perhaps the stock wouldn’t be doing as well without Target’s struggles. By going about it poorly, its rival may have made it easier for investors to justify buying shares of the largest retail chain.

But investors shouldn’t overlook valuations. Like Walmart did, the stock isn’t cheap: it’s trading at 37 times the winningswhich is a rich valuation for a company that is growing in the single digits. Target, meanwhile, trades at just 13 times earnings.

The danger is that Walmart’s high valuation could limit future returns for investors who buy the stock today. But at the same time, while the economy still faces challenges, Target also isn’t a slamdunk buy simply because of its low valuation, as it could continue to struggle to grow earnings over the course of quarters to come.

I think Walmart is the best buy right now, but investors should prepare for the possibility of a near-term slowdown, especially if the markets turn down. But in the long term, the company could still have great potential as it continues to expand its e-commerce business.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool posts and recommends Target and Walmart. The Motley Fool has a disclosure policy.