Why Target Stock Is Hopping and Walmart Is Slipping. Both Had Strong Earnings. - Barron's

Walmart delivered a great quarter and is benefiting from many of the same factors helping Target.

Nicholas Kamm/AFP via Getty Images

In the battle of the retail giants, Target appears to have won this round.

Both Walmart (WMT) and Target (TGT) delivered fantastic second-quarter earnings reports this week, and Barron’s had noted ahead of the reports that Target was most likely to get a big boost from its results. That’s the way it has played out, with Target stock jumping 12% Wednesday afternoon, while Walmart has logged losses after its report on Tuesday.

Cowen & Co. analyst Oliver Chen, who called out Target’s potential to break out last week, wrote that the company’s “terrific growth and agile execution [drove] unprecedented upside” in the quarter He said he is optimistic about the company’s ability to attract and retain new customers while “successfully blending stores and digital inventory and delivery execution.”

The key difference between Target and Walmart’s quarters was the pace of recent sales. Walmart’s July same-store sales were up just 4%, less than half of the second-quarter total, and the company warned that waning stimulus checks would weigh on spending. By contrast, Target sounded upbeat about its ability to continue notching big revenue gains.

This divergence is backed up by foot traffic data, as tracked by Placer.ai, a data and analytics firm. While both Walmart and Target saw big declines in same-store sales in April, during the thick of lockdown measures and after panic-buying in March, Target recovered more quickly. Target visits went from being down 32.1% year over year in April to down just 2.1% in May, and stayed at roughly that level in June and July. However, while Walmart recovered to a 7.8% year-over-year fall in traffic in May from 19.7% drop in April, it once again was recording double-digit declines in both June and July.

Revenue and traffic weren’t the only areas were Target shone. The company added 10 million digital customers in the first half of the year, a period when it also grabbed $5 billion in market share. Its total same-store sales and e-commerce growth were higher than Walmart’s, although that is off a smaller base.

Of course, the Street always has one eye to the future, which will make some investors wonder how long the good times can keep going for Target. Certainly the stock may give back some of Wednesday’s double-digit pop near term, and there may be concerns that this just raises the bar for future quarters.

No one expects Target, or any other essential retailer, to keep up with the breakneck pace experienced this year. From panic buying to stimulus checks, there has been no shortage of extraordinary catalysts fueling sales, and those will eventually taper off. The question is whether these companies can retain the customers they have gained during the Covid-19 crisis, which will soften the descent and position them for growth.

Judging on this metric, there is reason to be bullish on Target even after Wednesday’s rally. Without a vaccine or effective treatment near-term, there is little reason to believe that recent consumer habits will change, and those have largely benefited the biggest retail players. With a few exceptions, consumers have been consolidating their trips, meaning one-stop shops such as Target are taking share from smaller rivals.

In addition, a 700% increase in drive-up ordering shows that Target’s omnichannel approach is resonating with consumers. Even as more shopping has moved online, a large network of physical stores remains a key asset, one advantage Target has over Amazon.com (AMZN).

“With Target’s market cap at $77 billion and Amazon’s market cap at $1.6 trillion, Target trades at 1 times sales and Amazon at 5 times sales,” Centerstone Investors Founder Abhay Deshpande noted. “There are way too many people on the other side of the boat.”

Editor's Choice

Likewise, Gordon Haskett analyst Chuck Grom thinks the “monster” results show that the gap between Target and Walmart’s multiples is also unjustified and he sees it narrowing in the coming months. “This development along with the high likelihood that Street estimates are meaningfully understated should drive [Target] well beyond recent highs.”

That said, there is room for more than one winner, and that bodes well for Walmart as well. Even if it is seeing a decline in sales as stimulus dries up, it still delivered a great quarter and is benefiting from many of the same factors helping Target.

Management’s downbeat tone may have helped reset expectations a bit, and of course if more government checks go out, or enhanced unemployment benefits return, that would help its top line.

Indeed it could win both ways. The continued delay in new stimulus, or a smaller stimulus this time, could help Walmart in refocusing consumers’ priorities on value, Jefferies analyst Christopher Mandeville noted. “As such, we remain confident that Walmart can grow long-term share. Reduced store hours and out-of-stocks also detracted from sales, both of which are returning to normalized levels.”

Even Cowen’s Chen, who highlighted Target’s better position into earnings, is bullish on both stocks. “In the near-term we believe Walmart is well positioned to compete in an uncertain consumer environment, while over the longer-term we expect Walmart to grow market share across grocery and other categories.”

Target was up 11.9% to $153.13 on Wednesday, while Walmart was off 1.4% to $132.79. The Dow Jones Industrial Average was up 0.3%.

Write to Teresa Rivas at teresa.rivas@barrons.com

Let's block ads! (Why?)

Read Again https://www.barrons.com/articles/target-stock-walmart-strong-earnings-pandemic-panic-buying-lockdowns-consumer-trends-51597862159

Bagikan Berita Ini