Given the uncertain macroeconomic scenario and the grocery industry’s resilient nature, the sector is expected to stay buoyed in the foreseeable future. In this article, I evaluated two grocery chain stocks, Target Corporation (TGT) and Big Lots, Inc. (BIG), to determine which could generate better returns.
In April, the Personal Consumption Expenditures (PCE) price index rose 0.4% and was up 4.4% year-over-year, higher than 4.2% in March. With inflation still well above the Fed’s target of 2%, there seems a need for more interest rate hikes. Amid persistent inflation, strong job growth, and high borrowing costs, the economy will likely suffer a recession this year.
Grocery chain stores often do well during recessionary periods because their products experience steady demand. The Department of Commerce reported that U.S. retail and food service sales for April 2023 amounted to $686.10 billion, reflecting a 0.4% monthly increase and a 1.6% year-over-year growth.
The retail grocery industry has been leveraging several technologies, such as AI, to make intelligent staffing and replenishment decisions. This optimizes labor and replenishment costs, eliminates out-of-stock situations, and maximizes sales. Grocery stores have also been renovating brick-and-mortar stores to enhance customer experience.
In addition, grocery chain companies are expanding their online presence owing to the widespread adoption of e-commerce platforms and the increasing demand for fast delivery services. The online grocery market is projected to reach $740.88 billion by 2027, growing at a 13.1% CAGR.
TGT’s stock has declined 14.4% in price over the past six months and 11% over the past year. In comparison, BIG’s stock has plunged 56.4% over the past six months and 68.6% over the past year.
But which stock is a better buy now? Let's find out.
Latest Developments
On February 28, TGT announced its plans to provide a redefined guest shopping experience, fostering long-term growth. The company aims to allocate $4-5 billion this year to expand guest-centric services, bolster its operational network, fortify supply chain facilities, enhance digital offerings, and develop other essential capabilities.
This year, TGT has also planned to introduce or expand 10+ proprietary brands, enriching the product assortment with remarkable offerings at affordable prices. The company intends to strengthen promotions, enhance the Target Circle loyalty program, and launch an innovative advertising campaign, showcasing its ability to deliver affordable products.
On May 23, BIG announced the suspension of dividend payments. This decision could have repercussions for BIG’s shareholders, who depend on dividends as a source of income. This would also impact investors’ confidence and potentially cause a decline in the company’s stock value.
Recent Financial Results
For the fiscal first quarter that ended April 29, 2023, TGT’s sales marginally increased year-over-year to $24.95 billion, while its other revenue grew 10.2% from the previous year’s period to $374 million. Its cash inflow from operating activities stood at $1.27 billion, compared to a cash outflow of $1.39 billion in the prior year’s quarter.
Furthermore, as of April 29, 2023, TGT’s total assets came in at $52.15 billion, compared to $50.84 billion as of April 30, 2022.
BIG’s net sales decreased 18.3% year-over-year to $1.12 billion for the fiscal first quarter (ended April 29, 2023). Its operating loss widened by 1,828.8% from the prior year’s period to $261.18 million. Moreover, the company’s net loss and loss per share worsened by 1,759.5% and 1,720.5% year-over-year to $206.07 million and $7.10, respectively.
Past and Expected Financial Performance
TGT's revenue grew at a 10.9% CAGR over the past three years, whereas BIG's revenue declined by 1.5% CAGR during the same period. Over the last five years, TGT achieved an 8.3% CAGR in revenue growth, while BIG experienced a slight decline at a 0.1% CAGR.
Furthermore, TGT's total assets grew at a 5.2% CAGR over the past three years, whereas BIG's total assets saw a 2.6% CAGR increase.
Analysts expect TGT’s revenue and EPS for the fiscal year (ending January 2024) to increase 1.3% and 38.3% year-over-year to $110.50 billion and $8.32, respectively. Furthermore, the company’s revenue and EPS for the fiscal year 2025 are expected to rise 1.9% and 23.7% year-over-year to $112.54 billion and $10.30, respectively.
BIG’s revenue for the fiscal year 2024 is expected to decrease 10.7% year-over-year to $4.89 billion, while its loss per share is expected to widen 62.5% year-over-year to $9.68. Also, analysts expect BIG’s revenue for the fiscal year 2025 to marginally decrease year-over-year to $4.85 billion. The company is expected to report a loss per share of $5.02 for the same period.
For the fiscal 2024 second quarter ending July 2023, analysts expect TGT’s revenue to decline 1.1% year-over-year to $25.75 billion, while BIG’s revenue is expected to decline 17.6% year-over-year to $1.11 billion.
Profitability
TGT’s trailing-12-month revenue is 20.9 times what BIG generates. Moreover, TGT is more profitable, with a trailing-12-month EBITDA margin of 6.08% compared to BIG’s negative 3.82%. In addition, TGT’s trailing-12-month ROCE, ROTA, and ROTC of 24.32%, 5.84%, and 8.43% are higher than BIG’s negative 52.97%, 5.41%, and 7.55%, respectively.
POWR Ratings
TGT has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. Conversely, BIG has an overall rating of D, translating to a Sell. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. TGT has a C grade for Sentiment, consistent with its mixed analyst expectations. On the other hand, BIG has an F grade for Sentiment, in sync with its unfavorable analyst estimates.
TGT also has a C grade for Stability, consistent with its 60-month beta of 1.03, while BIG has a Stability grade of D, justified by its 60-month beta of 1.98.
Of the 37 stocks in the A-rated Grocery/Big Box Retailers industry, TGT is ranked #27, while BIG is ranked last.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Value, Momentum, and Quality. Click here to view TGT Ratings. Get all BIG ratings here.
The Winner
Amid uncertain economic conditions, grocery chain stores tend to perform relatively well because their products enjoy steady demand. Therefore, prominent grocery chain companies TGT and BIG are poised to benefit from the grocery sector’s tailwinds.
However, considering BIG’s relatively weak financial performance, low profitability, and limited growth potential, its competitor, TGT, could be a better buy now.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Grocery/Big Box Retailers industry here.
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TGT shares were trading at $131.48 per share on Wednesday afternoon, down $1.22 (-0.92%). Year-to-date, TGT has declined -10.63%, versus a 12.16% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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