Holiday Hiring: Wal-Mart Insults Target – Wal-Mart Stores, Inc. (NYSE:WMT)

By Ben Reynolds

Wal-Mart (WMT) and Target (TGT) are direct competitors in the U.S. discount retail industry. Specifically, both companies have “big box” locations that focus on offering consumers merchandise at low prices. With similar business models, Target and Wal-Mart have similar business characteristics. Both are highly profitable:

  • Wal-Mart generated $12.7 billion in net income over the last year.
  • Target generated $2.8 billion in net income over the last year.

Both have long dividend histories and are members of the exclusive Dividend Aristocrats list:

  • Wal-Mart has paid increasing dividends for 44 consecutive years.
  • Target has paid increasing dividends for 46 consecutive years.

And both companies also recently released their plans for hiring during the holiday season. The holiday season is “the most wonderful time of the year” for discount retailers like Wal-Mart and Target. Store traffic and sales surge as consumers rush to buy gifts and supplies for the holiday season. The dramatic rise in customers and purchases creates stress on the work forces of discount retailers. This tends to mean stores hire seasonal employees to keep up with demand. Target and Wal-Mart’s hiring plans for the coming holiday season are very different. Target released its holiday hiring announcement first.

Target’s Hiring Plan for the 2017 Holiday Season

Target announced its holiday hiring plan on Sept. 13th. An excerpt from the announcement is below:

To kick things off, we’re planning to hire approximately 100,000 team members to serve guests at our 1,816 stores across the U.S., and an additional 4,500 team members for our distribution centers (DCs) and fulfillment facilities.

Target plans on hiring around 100,000 people for this year’s holiday season. This is up from around 70,000 for either of the 2015 or 2016 holiday seasons. Target’s holiday season hires are projected to grow by 43% from 2016 to 2017.

The discount retail industry is characterized by low margins. You can’t sell discount retail and not have low margins — it just isn’t possible. Efficiency matters. Target’s sales have not grown anything close to 43% over the last year. The company’s sales have grown just 0.3% through the first half of fiscal 2017 versus fiscal 2016.

Maybe Target is expecting a better holiday season in 2017 than 2016. If you are very optimistic, maybe 5% sales growth — and a 5% increase in hiring — is appropriate. Nothing about Target’s business as it stands today warrants such a dramatic increase in hiring. Target is trying to pass off the massive uptick in hiring as an “investment.” The following is another excerpt from the 2017 hiring announcement:

The increase in hires — which will help us keep improving our guest service — is part of the investments we announced earlier this year.

Hiring seasonal workers is not a business investment. It is an expense. Maybe Target will have better service this year, but its margins will likely be a bit lower as well. Hiring and then laying off seasonal workers doesn’t create goodwill with the full-time work force in any meaningful way.

Wal-Mart has chosen to address the 2017 holiday season in a different way.

Wal-Mart’s Hiring Plan for the 2017 Holiday Season

Wal-Mart released its holiday hiring plan on Sept. 20th, one week after Target’s announcement. The title of Wal-Mart’s announcement was “Walmart’s Hiring Plan: More Hours for Current Associates.” The title of the announcement seems like a subtle insult to Target’s announcement. In a video covering the same topic, Wal-Mart COO Judith McKenna said the following:

We are offering the extra hours available this time of year to our current associates rather than hiring thousands of seasonal workers.

This is the same approach Wal-Mart took for the holiday season last year. It shows a greater commitment to current employees who benefit from extra hours during a time of year when money tends to be tight for many people. It’s difficult to rationalize adding 100,000 seasonal workers as an investment in a business. Seasonal workers — by definition — are not permanent. They aren’t part of a company’s long-term plan.

Contrast this to Wal-Mart’s strategy. Wal-Mart is rewarding its current employees with additional hours; this is an investment in its permanent workforce.

Target and Wal-Mart as Investments

In the final analysis, neither company’s holiday plans are going to have a dramatic impact on the future of either business. They do, however, show a difference in management strategy.

Wal-Mart really is attempting to invest in its permanent workforce. The company is trying to increase productivity by doing more with the same amount of people. Target is hiring seasonal workers to provide better service. This is more of a short-term mindset as it doesn’t strengthen ties with employees who will be with Target over years instead of months. Target is trying to offer better service by spending more.

I am long both Target and Wal-Mart. Wal-Mart’s holiday plans better align with the company’s message and stakeholders. There’s also a subtle tone of one-upping Target in Wal-Mart’s announcement (in my view). As investments, I prefer Target to Wal-Mart at current prices. This is entirely a function of value. Wal-Mart’s management has turned the company around and is now showing revenue growth and positive comparable sales growth in the U.S.

Target’s management, on the other hand, has only just begun its investment phase. The company appears to be a few years behind Wal-Mart in online sales and business strategy in general. That said, the most appealing aspect of Target as an investment is its low valuation:

  • Target has a forward P/E ratio of 13.5 and a 4.2% dividend yield.
  • Wal-Mart has a forward P/E ratio of 17.4 and a 2.5% dividend yield.

Wal-Mart is the better-run company today, but it’s also much more expensive. Target does appear to be headed in the right general direction. The company is investing heavily in competing in an omnichannel environment and improving its stores.

Due to its valuation, Target is a buy at current prices and ranks well using “The 8 Rules of Dividend Investing.” The company has struggled some in recent years, but is still highly profitable and is likely to show reasonable growth over the long run.

Wal-Mart is also likely to show decent growth over the long run. The company is too large to grow rapidly, but is a stable dividend growth stock. Wal-Mart’s stock price increase from the high $50s in late 2015 to around $80 today makes the stock a hold.

Wal-Mart and Target are both high quality dividend growth stocks. Sure Dividend created Undervalued Aristocrats for investors to quickly identify stocks that are undervalued and likely to pay rising dividends regardless of the overall economy. Click here to start your free trial today.

Disclosure: I am/we are long TGT, WMT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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