2 Important Retail Stock Battles to Watch
The corporate world is filled with heated rivalries spread across many industries. Like classic sports team rivalries, they capture our imaginations because we can’t resist seeing two well-matched giants battle it out.
As investors, there can be even more on the line. Developments around sales, margins, and capital expenditures can give a crucial edge to one company. Often, the other fights back with a punch of its own to keep us on the edge of our seats.
This upcoming week we will get to see another round in two of corporate America’s most intense battles. These quarterly updates will not only tell us about who is getting ahead, but the outlook for the overall retail space.
Walmart vs. Target
Walmart (NYSE: WMT) reports second-quarter results before the open on August 16th. Wall Street will be looking for earnings per share (EPS) of $1.62 which would represent a 9% decline from the same period last year.
Late last month management for the world’s largest retailer surprised the market by cutting its Q2 and full year guidance due to the impact of rising food prices on consumer spending. The fact that people are skewing their purchases towards low-margin groceries is bad news for Walmart because it means they are spending less on higher-margin items such as clothing and electronics.
The flipside is that more shoppers are choosing Walmart to save money in an inflationary environment which is helping it gain grocery market share. This along with low prices on back-to-school supplies could keep consumer traffic flowing to Walmart for the rest of the summer.
Target (NYSE: TGT) is dealing with an inventory glut that prompted it to also reduce its fiscal Q2 guidance. With the company scrambling to markdown merchandise to make room for back-to-school and fall holiday items, management drastically reduced its operating margin forecast to around 2%. This came on the heels of a big Q1 profit miss that caused the stock to gap down to its lowest level in nearly two years.
Target shares have perked up in recent weeks with the market in a better mood thanks to signs of inflation relief. The bar is set low for its August 17th report with analysts expecting EPS of $0.72, about one-fifth what delivered a year ago. Investors will need to be convinced that the inventory strategy is working and the turnaround plan on target.
Better Earnings Beat Potential: Target
Home Depot vs. Lowe’s
Since Home Depot operates under a different fiscal calendar, its Q2 results will include the May through July period and therefore largely hinge on homebuilding and remodeling activity.
Based on the National Association of Homebuilders’ recent survey, the remodeling market declined compared to last year in Q2, but a reading of 77 suggests that remodeling conditions remained good. Better yet, the latest Commerce Department data shows that building materials sales were up 5.6% and 6.4% in May and June, respectively.
Investors have already received clues about how Home Depot’s report could go from a few construction-related companies. Stanley Black & Decker fell short if its lowered Q2 earnings benchmark. Masco was a couple pennies shy of the Street’s EPS target, but flat year-over-year profits could be interpreted as a positive given how strong last year’s performance was.
For Home Depot to top its EPS expectation, it will likely have had to do another good job of attracting professional and do-it-yourself customers. Based on the retailer’s eight-quarter earnings beat streak, there’s a good chance it did. Healthy trends in both segments and an emerging digital presence point to another constructive report.
Lowe’s Companies (NYSE: LOW) reports the day after Home Depot and the seasonally strong quarter is expected to have produced EPS of $4.59, or 8% year-over-year growth. Lowe’s too has a good track record of producing earnings beats and pleasing shareholders with dividends.
After last quarter’s beat, the company announced a 31% increase in its dividend which became payable earlier this month. Lowe’s 2.1% forward yield, however, like its market share, still trails that of Home Depot which sits at 2.4%.
When it comes to picking sides in a close rivalry, the market tends to lean towards the winner. And with Home Depot generating roughly 1.5x the amount of sales that Lowe’s does, Lowe’s tends to play second fiddle in this industry.
However, as seen by both last year’s and this year’s relative stock performance, Lowe’s is putting up a good fight. Under CEO Marvin Ellison improved financial discipline, astute investments, and a focus on customer service have the company in position to capture market share gains. Upgrades to Lowe’s e-commerce and business analytics capabilities stand to draw in more customers and increase profitability.
The Street also sees slightly more upside in the underdog’s share price. Based on analyst activity within the last three months, the consensus price target implies 13% for Lowe’s compared to 10% for Home Depot.
But until the challenger shows that it is gaining significant ground, it may be better to side with the leader on this one.
Better Earnings Beat Potential: Home Depot
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