Certain retail stocks have fallen on hard times lately. Although the economy is doing well overall and remains at near full employment, several years of above-normal inflation and higher interest rates have put pressure on consumers.
Two retail stocks that have been decimated are Goal (NYSE: TGT) And Dollar general (NYSE:DG). Both are well below their all-time highs, and both appear to be trading at bargain prices. But which stock is the best buy today?
Do you miss the morning spoon? Wake up with Breakfast news in your inbox every market day. Register for free »
In the chart below you can see how far each company has fallen. The price slide started in late 2021, when many home goods and other physical goods stocks started feeling the post-pandemic hangover. Dollar General then collapsed in early 2022 and saw its shares fall even further. Although each stock traded at a price-to-earnings (P/E) ratio in the mid-20s at one point in recent years, both stocks have seen their valuations collapse even as earnings have fallen.
If economic conditions improve, any business could see a major recovery. However, both companies are experiencing similar, but not identical, problems. Can they be overcome?
Although they have slightly different core customer profiles, Target and Dollar General are seeing their customers cut back on spending due to inflation while costs rise.
In August, Dollar General CEO Todd Vasos noted that 60% of Dollar General’s sales come from households earning $35,000 or less per year. Vasos explained that Dollar General’s weakest weeks of the previous quarter were the last weeks of each month. That suggested customers were becoming financially stressed as their monthly budgets were running out.
Perhaps related to this stress, management also noted that shrinkage or theft represented a 21-point headwind to gross margins. So while theft has been a problem since the pandemic, Dollar General still saw more thefts than last year.
Target’s most recent disappointing quarter showed similar headwinds. Although Target’s core customer is more middle-class, CEO Brian Cornell noted that its customers have been “shopping carefully,” basing themselves on promotions as they arise, while only occasionally spending money for “key seasonal moments.”
On the cost front, Cornell also noted that the company had to spend additional money diverting inventory to West Coast ports when East Coast dock workers threatened to strike. This resulted in additional costs and negative consequences for revenues.
On the plus side, Target’s shrink problem has actually improved, unlike Dollar General’s. However, the disappointing results can also mean increased competition. Competitor Walmart (NYSE:WMT) posted a favorable quarter, suggesting customers may have drifted away from Target for Walmart’s generally lower prices.
Although Dollar General is down more and trades at a slightly lower price-to-earnings ratio, Target seems like the safer bet right now.
Although Dollar General has been seen as resilient in the face of a bad economy or recession, the high-inflation economy may appear to be even more damaging to its core customers than a recession, with housing and food prices hitting lower-income Americans in pressure in a broad sense. fashion.
Meanwhile, Target’s customers, while certainly looking for deals, appear to be a bit more resilient and less likely to resort to theft. The shrink problem remains one that Dollar General doesn’t seem to be able to completely solve, while Target seems to be getting things under better control on that front.
And while Target is coming off a bad quarter, it has also had some good quarters here and there over the past year, with the port issues in the third quarter seemingly a one-off. So Target has managed to pay down debt faster and reduce its debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio, while Dollar General’s debt ratio continued to rise:
While a dramatic improvement in the environment or Dollar General’s execution could theoretically lead to more upside, Target seems like a safer bet at the moment. The stock may be worth a look after the recent pullback.
Consider the following before buying shares in Target:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Target wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $869,885!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns November 18, 2024
Billy Duberstein and/or his clients have no positions in the stocks mentioned. The Motley Fool holds and recommends positions in Target and Walmart. The Motley Fool has a disclosure policy.
Better Beaten-Down Retailer: Target vs. Dollar General was originally published by The Motley Fool
