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Target & Walmart Carnage - A Lesson On Post-Pandemic Resets

Hebrews Chapter 6 verse 10 states, "God is not unjust; he will not forget your work and the love you have shown him as you have helped his people and continue to help them."


Justice is an interesting word - to think about what it means. From my imperfect perspective, justice is limited as I do not have God's full and perfect wisdom. So when the Bible says that God is not unjust, it is on His terms, and not mine. The great part about God though is His love and forgiveness - He will forget my sins and wrongdoing if I accept Him into my life, but won't forget the deeds that I do for Him.


While it's no fun being a part of the market's turmoil and volatility, I do sense that the market is finally accepting the fact that there is far too much overvaluation out there still. We've seen Big Tech begin to fall, and now we are seeing other major legacy incumbents get hit. Is this justice? For those like myself that have been dealing with this the past 12 months, it's probably as close as it gets, as the data clearly illustrates overvaluation concerns.


Topic

I have to admit that I find a ton of irony this week as both Walmart, Inc. (WMT) and Target Corporation (TGT) reported their earnings. Last year, everyone focused on non-aggressive growth thought that they had won with the "rotation" in full effect. All of a sudden in 2022, legacy incumbents like WMT and TGT are dropping 15-25% in one day - ouch!


The pandemic inflated many companies and the bad part is that the weaker companies that were inflated - WMT and TGT among many others - are going to see a very strong reset back to slowing performance. This reset will translate to lower SP valuations as yes, even WMT and TGT got caught up in the pandemic euphoria. This type of result transcends Big Tech, and the thousands of legacy incumbent companies out there. It's a continued theme as to why picking winners is of the utmost importance.


Key Takeaways


This is pretty straight forward - valuation continues to be a pain for investors as the pandemic has muddied pretty much every sector and industry. Today's market continues to get it wrong on multiple fronts.


Even with the recent beat-down this week, both WMT and TGT are still trading at peak levels when compared to historical averages the past decade, for both EV/Sales and OCF/Share multiples. I've seen some talk about inventory issues, port congestion, and inflationary pressures on the cost side. And of course, all of these variables are at play. But neither company will be able to escape the fact that government shutdowns and pressures to keep people from normalcy was a huge windfall.


The key indicator is Revenue performance as to the slowing effect. Both WMT and TGT witnessed a bump in Revenue performance with TGT seeing a substantially stronger increase. However, both companies have seen a strong reversal for Q1 FY 2023 that is poised to be the new-normal versus the short-lived spurt the past couple years.


The other primary factor for valuing WMT and TGT is predicated on GM and OCF Margin performance. Both companies saw improved margin performance, notably for OCF Margins, while the opposite has occurred from Q1 FY 2023. In fact, OCF Margins have deteriorated dramatically, which speaks to some of the other variable issues as mentioned above. While I don't believe that the current LTM OCF Margins will stay this low, they will neither return towards peak-pandemic levels.


Lastly, an important point for aggressive growth investors is e-commerce performance. WMT disclosed a 1% gain during Q1 FY 2023, while TGT actually witnessed e-commerce results decline from the prior quarter. This is consistent with Amazon, Inc.'s (AMZN) negligible 1P and 3P GMS e-commerce growth during its Q1 2022 result. Companies like Wayfair, Inc. (W) have fared worse seeing e-commerce declines of 14% in Q1 2022, with Chewy, Inc. (CHWY) being on deck to see likely weaker results as well. All while leading aggressive growth peers continued to see robust results for their respective Q1s in 2022:

  • Coupang, Inc. (CPNG) - 22% e-commerce growth

  • MercadoLibre, Inc. (MELI) - 27% GMV growth

  • Sea, Ltd. (SE) - 39% GMV growth

  • Shopify, Inc.'s (SHOP) - 16% GMV growth

It's clear who continues to take market share across the globe, while others struggle. This is a sign of things to come.


Why it Matters


For investors, there is no safe haven any longer. 2021's "rotation" was actually a major red flag. Once markets turned on aggressive growth selectively, and parity was broken, two scenarios were in play. Either aggressive growth plays were going to regain their leadership role, or the broader markets were going to fall victim to a correction/recession. Unfortunately the latter is occurring right before our eyes.


It's a wake-up call and reality check for those thinking that Big Tech and legacy incumbents were going to continue to get a free pass. Companies like WMT and TGT are not innovators and will struggle as yet another new-normal unfolds. Even Big Tech companies are now at risk of killing innovation rather than leading it as they become more political and defensive against the competitive marketplaces. In my mind, investing in companies like WMT and TGT is much more risky than pursuing aggressive growth plays that are clearly continuing to dominate and take market share.





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