Retail

Much Anticipated Quarterly Reporting For Target, Walmart


Investors and retail industry watchers are anticipating next weeks second quarter financial results for both Walmart
WMT
and Target on August 16th and 17th respectively. And the Street is ready for the heat. According to Zacks Investment Research, based on 13 analysts’ forecasts, Target’s consensus EPS forecast for the quarter is $0.72. The reported EPS for the same quarter last year was $3.64, ouch!

Walmart warned that quarterly and yearly earnings will be lower than first expected. But of the two, Walmart has been hit harder by inflation, forcing customers to pare back on higher margin discretionary items to meet basic needs, and in some cases forced to trade down to dollar stores.

Target and Walmart have both made headlines in the last several months, as each has continued to struggle from a supply chain hangover. Target and Walmart both missed first quarter projections, rather dramatically. This pushed shares of Target down by 25% to about $162 on May 18th.

Target entered the second quarter with inventory up 43%. Target, in a June 7th press release Target said it would take additional markdowns along with removing excess inventory and canceling orders to right size its stock levels. Additionally, Target also said it is making “rapid revisions to sales forecasts, promotional plans and cost expectations by category.” Target revised its Q2 down to an operating margin rate of around 2%, compared to previous guidance of within a “wide range” of 5.3%.

Exactly two weeks later, Target CEO Brian Cornell addressed the Economic Club of New York, reiterating their plans to take swift action to aggressively mark down inventory amid “an environment many of us haven’t seen before.”

This was clearly not the performance or results that Team Target and CEO Brian Cornell were accustomed to sharing. Clearly, beyond supply chain issues and excess inventory, there had been a shift in what consumers wanted and needed, and it blindsided both Target and Walmart. “We didn’t anticipate the magnitude of that shift,” Target’s CEO Brian Cornell said.

Objective Overview

While Target has clearly “taken its medicine” to deal with its inventory glut, it has also been dealing with the same hyper-inflationary environment that every retailer has been dealing with.

To get a more objective look at superstore foot traffic in the second quarter I turned to Placer.ai who has become the industries de facto retail traffic counter. This category includes retail giants such as Walmart and Target and wholesale clubs like Costco and BJ’s Wholesale Club.

In Q2 2022, quarter-over-quarter (QoQ) foot traffic to superstores jumped and increased relative to both Q2 2021 and Q2 2019. The brands in this space no doubt benefited from the inflation and high gas prices of Q2 2022 by catering to consumers looking to consolidate shopping trips and buy value-priced items in bulk.

Overall superstore traffic was up 9.3% quarter-over-visits in Q2 2022, this is in sharp contrast to Q1 2022’s category wide -17.4% visitor contraction. Additionally median visit length in the category increased by 4.5% between Q1 and Q2 as consumers took more time in stores filling their carts to avoid multiple shopping trips.

Focusing in on Walmart and Target, year-over-year comparisons show both retailers up. According to Placer.ai Target’s Q2 2022-foot traffic count was up 5.1% year-over-year, while Walmart’s was up 4.7%. Both figures are marginally higher than Q1 2022 numbers. However, looking at pre-pandemic, year-over-three-year comparisons, Target leads with a 12.8% increase over Walmart’s -1.5% contraction.

Back On Target?

As analysts and market watchers anticipate Target’s earnings report, consensus is that inventories are expected to grow by 13% from a year ago, while gross and operating margins are seen falling from last year’s Q2, as discounts and higher supply-chain costs cut into profits.

UBS analyst Michael Lasser recently told clients that Target is likely to emerge much stronger after its second quarter results than it did following its first quarter disclosure. He went on stating “Target’s multiple guidance cuts this year do not necessarily translate to doom and gloom for the stock,” he advised clients. “We believe Target is well positioned to capitalize on changing consumer behaviors and habits.”

Lasser explained that the aggressive actions taken by management to cut excessive inventory are beginning to bear fruit and should lead to long-term upside. Additionally, he expects the retailer to pleasantly surprise skeptical onlookers with a promising same-store sales report in its August 17th earnings report.

A slightly less rosy prediction comes from Evercore
EVR
, whose concern is that margins are likely to remain under pressure into the second half of the year. They also pose some concerns that since the June update, they may have experienced some worsening trends.

I fall somewhere in the middle. In the short term, economic headwinds will likely impact Target’s profitability. However, the loyalty that they built by holding costs, combined with increased shopping duration (and likely bigger basket size) will continue to favor them long term. I would also argue that during the period of hyperinflation, Target’s higher average household income has favored them, over Walmart. Many more Walmart’s customers have had to trade down to dollar stores and Aldi, and it could become a challenge for Walmart to win them back.

Looking Ahead

Watch for my summary of Target’s second quarter earning’s report next week. Additionally, I will share some early thoughts on Target’s impressive back-to-school and back-to-college merchandising campaigns which should begin to paint a rosier picture on Target’s ability to show both top line and bottom-line progress in the third and fourth quarters. The Tarjay days are far from over.



READ SOURCE

Read More   Oil Down Again as Brent Clings to $50 Amid New Covid Strain

This website uses cookies. By continuing to use this site, you accept our use of cookies.