Weekly Updates - Nov 20, 2022

By: Matthew Otto

Retail has caught a lot of attention this week, in particular two of the largest chains in the country.

Walmart shows signs of strength

Walmart reported strong revenue growth globally in its third quarter, with particular strength in its Walmart U.S., Sam’s Club U.S., Flipkart, and Walmex divisions. Total revenue for the quarter was $152.8 billion, up 8.7% from the same period last year, or 9.8% in constant currency. In the U.S., Walmart’s comp sales grew by 8.2%, and 17.4% on a two-year stack. The company’s eCommerce sales also grew by 16% and 24% on a two-year stack, as Walmart continued to gain market share in the grocery sector. Sam’s Club’s comp sales for the quarter increased by 10.0%, and 23.9% on a two-year stack, while membership income increased by 8.0%. Walmart International’s net sales were $25.3 billion, an increase of $1.7 billion, or 7.1%. The division was negatively affected by $1.5 billion from currency fluctuations. However, overall, Walmart delivered strong growth in the third quarter, with positive results across its various businesses.

With a global advertising business growing over 30%. Walmart Connect in the U.S. led the growth with a 40% increase, and Flipkart Ads also performed well. Despite marked improvement in operational efficiency, consolidated gross profit rate declined 89 basis points due to mix of sales in the U.S., an inflation-related LIFO charge at Sam’s Club, and the timing of Flipkart’s annual event, The Big Billion Days. On a positive note, Walmart’s consolidated operating expenses as a percentage of net sales increased 144 basis points due to charges of $3.3 billion related to opioid legal settlements. However, adjusted operating expenses as a percentage of net sales decreased 75 basis points, which is primarily attributed to strong sales growth and lower Covid-related costs.

Consolidated operating income was down 53.5% due to legal charges. However,adjusted operating income was up 3.9%. This shows that the company is still doing well financially despite the charges. Second, EPS was down due to investment losses and charges related to opioid legal settlements. However, the company approved a new $20 billion share repurchase authorization, showing that it is confident in its future prospects

Wall Street analysts are becoming more bullish on Walmart stock as reslt. Several firms raised their price targets on the stock this week, and the average price target for WMT is 156, Lowest stock forecast is 121, average price target is 138.5

Evercore analyst Greg Melich raised his price target to $140 from $135 but maintained an in-line rating.
Truist analyst Scot Ciccarelli stepped up his price target to $150 from $134 but maintained a hold rating.
DA Davidson analyst Michael Baker upgraded his price target to $173 from $163 and maintained a buy rating.
MKM Partners analyst Bill Kirk raised his price target to $171 from $158 while maintaining a buy rating.
UBS analyst Michael Lasser mooved his price target on Walmart to $170 from $158 while maintaining.
Deutsche Bank analyst Krisztina Katai raised her price target to $168 from $161 while maintaining a buy rating.
Cowen analyst Oliver Chen upgraded his price target from $165 to $175 while maintaining an Outperform.
Stifel analyst Mark Astrachan upgraded his price target from $149 to $157 while maintaining a Hold.
BAML analyst Robert Ohmes raised his price target from $155 to $165 while maintaining a Buy.
RBC analyst Steven Shemesh upgraded his price target from $151 to $163 while maintaining an Outperform.
BMO analyst Kelly Bania upped her price target from $160 to $165 while ratining an Outperform.
Raymond James analyst Bobby Griffin lifted his price target from $150 to $160 while staying at an Outperform.
Keybanc analyst Bradley Thomas upgraded his price target from $155 to $165 while maintaining an Overweight rating.
Telsey Advisory Group analyst Joseph Feldman raised his price target from $160 to 165 while keeping an Outperform.

Target doesn’t follow the trend

On the other hand Target got less affectionate reaction after cutting its fourth-quarter outlook, after seeing sales slow in late October. The big-box retailer saw sales decline as families contended with higher prices, making trade-offs between what they need and what they want. Target plans to cut up to $3 billion in total costs over the next three years. In its fiscal third quarter, Target’s profit fell by around 50% as it cleared through unwanted inventory and sales slowed heading into the holidays. The company cited the need to become more efficient after two years of dramatic sales gains. Target’s decision to lower costs demonstrates its commitment to weathering the current retail landscape.

Target Chief Growth Officer Christina Hennington said customers’ price sensitivity intensified during the last two weeks of October.

“It was a precipitous decline and, frankly, we’ve seen those trends in the early part of November as well,” she said on a call with reporters. The company reported earnings per share of $1.54, missing analysts’ expectations of $2.13. Target also saw a drop in revenue, which came in at $26.52 billion versus the $26.38 billion that was expected. Despite the challenges that it faces, Target is still planning to open dozens of new stores next year and invest heavily in its e-commerce business.

As expected the reaction from Wall Street has been negative:

Raymond James analyst Bobby Griffin lowered his price target for Target from $200 to $185 while maintaining a “strong buy” rating.
JP Morgan analyst Christopher Horvers downgraded Target from “overweight” to “neutral” and lowered his price target from $217 to $201.
Baird analyst Peter Benedict downgraded Target from “outperform” to “neutral” and lowered his price target from $190 to $180.
RBC analyst Steven Shemesh downgraded Target from “outperform” to “sector perform” and lowered his price target from $223 to $206.
Credit Suisse analyst Robert Moskow downgraded Target from “outperform” to “neutral” and lowered his price target from $180 to $165.
UBS analyst Michael Lasser downgraded Target from “buy” to “hold” and lowered his price target from $205 to $194.
Citigroup analyst Paul Lejuez upgraded Target from “buy” to “strong buy” and raised his price target from $184 to $177.
Piper Sandler analyst Edward Yruma upgraded Target from “neutral” to “overweight” and raised his price target for the stock from $190 to $200.
Deutsche Bank’s Paul Trussell lowered his target from $183 to $144.
BMO’s Kelly Bania dropped her estimate from $190 to $165.
Telsey’s Joseph Feldman maintained his Outperform rating but still lowered his target from $185 to $175.
Keybanc’s Bradley Thomas kept his Overweight rating but cut his target price from $200 to $180.

Despite the downgrade, analysts are still bullish on Target’s long-term prospects. The company is in the midst of a multi-year turnaround effort, and its focus on improving its digital capabilities and expanding its same-day delivery options should help it compete effectively against Amazon (AMZN) and Walmart (WMT).

Ross joins Walmart with positive news

Ross Stores Reports Solid Third Quarter Results with Strong Operating Margin

Barbara Rentler, CEO of Ross Stores, announced that the company’s third quarter earnings per share were $1.00 on net income of $342 million, compared to earnings per share of $1.09 on net income of $385 million for the same period in 2021. Sales for the quarter were $4.6 billion, in line with the prior year, with comparable store sales down 3% on top of a robust 14% gain for the same period in 2021. For the first nine months of 2022, earnings per share were $3.08 on net earnings of $1.1 billion, compared to $3.82 per share on net income of $1.4 billion for the same period in 2021.

Despite the challenging environment, Ross Stores delivered strong results in the third quarter, evidence of the company’s agile operating model and compelling value proposition. Ms. Rentler also noted that Ross is on track to repurchase $950 million in common stock by the end of fiscal 2022, under its two-year $1.9 billion repurchase program, which extends through fiscal 2023. These announcements demonstrate Ross’ commitment to shareholder value and confidence in its continued strong performance.

Deutsche Bank’s Gabriella Carbone raised the price target from $99 to $121.
UBS’s Jay Sole raised the price target from $92 to $108.
JP Morgan’s Matthew Boss raised the price target from $112 to $121.
Citigroup’s Paul Lejuez raised the price target from $100 to $116.
Morgan Stanley’s Kimberly Greenberger assigned an Overweight rating with a price target of $127, up from $119.
Gordon Haskett’s Chuck Grom upgraded ROST from a Hold to a Buy, with a price target of $130.
Credit Suisse’s Michael Binetti maintained an Outperform rating with a price target of $123, up from $99.
Wells Fargo’s Ike Boruchow maintained an Overweight rating with a price target of $120, up from $110.
Telsey Advisory’s Dana Telsey maintained a Market Perform rating with a price target of $120, up from $80.

Ali Baba doesn’t miss out

With online retail Ali Baba finally had positive news as despite the challenges posed by the COVID-19 pandemic, Alibaba Group had a strong third quarter, with healthy revenue growth and margin expansion. Net cash flow from operations was up significantly year-over-year, and the company repurchased US$18 billion of its own shares as planned. Going forward, Alibaba is well-positioned to continue generating strong returns for shareholders, thanks to its leading position in the Chinese e-commerce market and its growing ecosystem of businesses. With healthy revenue growth and adjusted EBITA growth of 29% year-over-year. The company also announced an expansion of its share repurchase program, authorizing up to an additional $15 billion in share repurchases in 2025.

Wall Street Action

Truist analyst Youssef Squali lowered his price target from $125 to $120, but maintained a Buy rating.
Benchmark analyst Fawne Jiang lowered his price target from $206 to $180 and retained a Buy rating.
HSBC analyst Charlene Liu lowered her price target from $132 to $124 and maintained a Buy rating on.
Mizuho analyst James Lee lowered his price target from $160 to $155 and stayed with a Buy rating on.
UBS analyst Jerry Liu lowered his price target from $140 to $135, but remained a Buy rating on.
Citigroup analyst Alicia Yap lowered her price target from $146 to 144 while keeping a Buy rating.