The Retail Model Is Changing. Here's What Investors Need to Know About What's Driving Growth at Walmart and Target.

Walmart (NASDAQ: WMT) and Target (NYSE: TGT) both released earnings last week, and while they both reported strong growth, they got very different market reactions. Walmart stock fell 10% after earnings in one day, while Target stock gained 10%.

The market was unimpressed by Walmart's 5.9% sales growth in the 2026 fiscal second quarter (ended July 31), as U.S. comparable sales (comps) growth decelerated to 2.6% due to lower-priced pharmaceuticals. Target, on the other hand, had some of its best performance in years, with a 5.3% increase in sales in fiscal Q2 2026 (ended Aug. 1), driven by a 3.8% increase in comps. Target is in recovery mode, and investors are excited about its turnaround.

Image source: Walmart.

Both companies are operating in a different retail environment than they used to. In fact, while comps growth will certainly remain an important part of the story, other factors are playing a much bigger role than before, and the market isn't necessarily coming around to that yet.

The emergence of the non-core revenue sources

Walmart and Target are both retailers, which means their core business model is buying products at wholesale prices, marking them up to account for costs, and selling them at a profit.

However, while this remains their bread and butter, both companies are undergoing transformations that rely on other revenue sources, specifically membership and advertising. Walmart CFO John David Rainey said it clearly: "Our business is fundamentally changing. And if you look at the profit drivers of our business, almost half of the growth came from areas like membership, advertising, marketplace, and we expect this to continue." Advertising sales at Walmart increased 38% year over year, and membership fees increased a record 17%.

In-store comps were down in the low single digits in Q2, continuing a trend. However, store comps matter less as the company's model changes. E-commerce now accounts for 23% of Walmart's U.S. sales, about double what it was five years ago. Stores are increasingly responsible for fulfilling online orders, and they act as distribution hubs, not just stores, which is how Walmart can fulfill orders so quickly. In fact, you might find products available online from your local stores, but not on the shelves in the store, if they're in a designated back space for online delivery.

Against this backdrop, comps growth is less meaningful to the total business, and Walmart is switching gears to drive growth in other areas.

Image source: Target.

There's a similar dynamic happening at Target. While the overall comps growth was impressive, store comps increased only 2.7% year over year. Digital sales increased by 8.7%, indicating a larger shift online, while non-merchandise sales increased by more than 20%. These areas include Roundel, its advertising business, which reported a near-20% increase in gross billings, and revenue from Target Plus, its third-party marketplace, and membership fees, which both grew more than 40%.

Target's stores have long served as delivery hubs, and 95% of online orders are fulfilled in stores. It fulfilled 30% more same-day and next-day units over last year in the quarter, and digital continues to climb meaningfully as a portion of the business.

Expansion is good for the bottom line, and more

Not only are these new growth drivers adding revenue to the top line, but they're also higher-margin businesses that are good for the bottom line. Walmart noted that these other categories deepen the relationships with customers and create new opportunities, and improve economics. CEO John Furner said, "The math isn't simply one plus one equals two. The value comes from how these businesses work together, with each one strengthening the others and expanding what the company can do as a whole."

Considering the changing nature of its business, I think the market's reaction to Walmart's update was harsh. However, it's an expensive stock, which means it will get judged more harshly. Even at the lower price, it trades at more than twice Target's price-to-earnings (P/E) ratio.

TGT PE Ratio data by YCharts.

That implies that the market is still more confident about Walmart than Target. However, Target stock is up nearly 70% this year, and it could still be a major bargain.

Jennifer Saibil has positions in Walmart. The Motley Fool has positions in and recommends Target and Walmart. The Motley Fool has a disclosure policy.