Home Depot
and
Target’s
latest earnings give investors another reason to look forward to
Walmart’s
report. But those expecting
Walmart
stock to surge the way Target shares did after that retailer’s results should curb their enthusiasm.
Target stock jumped double-digits in percentage terms Wednesday after the company’s earnings blew past estimates, even though sales fell.
Home Depot
posted similar results earlier in the week—strong earnings, but weak sales—and has since seen its stock gain about 6% since Monday.
The biggest takeaways are that retailers still have some levers to pull to navigate a challenging environment, and that consumers are still hanging on, says John Tomlinson, global director of research at M Science. That bodes well for Walmart, which reports fiscal third-quarter earnings Thursday morning.
Analysts expect Walmart’s revenue will grow 4.4% year-over-year to $159.7 billion in the quarter. Same-store sales, which measure sales growth at stores open for more than a year, will grow by 3.7%, analysts predict.
Adjusted earnings are projected to clock in at $1.52 a share, up from $1.50 a share in the year-ago quarter.
The company is well-positioned to meet those expectations, or even deliver slightly better results.
“We see WMT as the best house on a wobbly consumer Street, and look for a solid beat from Walmart,” wrote Evercore ISI analyst Greg Melich in a note last week.
Just don’t head into Thursday expecting the stock to run up after the results, a la Target. Part of the reason Target shares gained so much is expectations were so low heading into the report. That isn’t the case with Walmart.
The company has been outperforming Target and Home Depot for several quarters now, and its stock price reflects that. Walmart stock trades at 24 times forward earnings, while Target’s shares trade at 13 times earnings and Home Depot at 19.6, according to FactSet.
That premium valuation is justified, given that the company is likely to keep gaining market share, wrote Oppenheimer analyst Rupesh Parikh in a note to clients. But high expectations leave “limited room for error” when the company reports earnings, he added.
The way the market reacted after
TJX Cos.
(TJX) reported earnings Wednesday might be a better comparison. Unlike Target and Home Depot, TJX saw strong increases in foot traffic and sales, a result of consumers becoming more price sensitive and searching for value. TJX also beat earnings estimates.
But the stock traded lower Wednesday because expectations were high heading into the report, and fourth-quarter guidance wasn’t strong enough for the market.
Walmart is facing an equally high bar, because—like TJX—it has benefited from the macroeconomic environment and subsequent changes in consumer behavior.
“Absent a really, really better-than-expected line item on the profitability side, I would expect the reaction to be much more muted relative to Target,” Tomlinson said.
Write to Sabrina Escobar at [email protected]
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