Walmart, Target Are Susquehanna's Top Picks Ahead Of Retail Earnings Season

A Susquehanna analyst is recommending Walmart Inc WMT and Target Corporation TGT ahead of the retail earnings season, and said that with the holiday season in the rearview mirror, the focus on retailer earning calls will be on 2018 guidance. 

The Analyst

Susquehanna analyst Bill Dreher said he continues to recommend Walmart and Target as top picks.  

The analyst reiterated positive ratings on Walmart and Target and increased the price target for Walmart from $115 to $126 on the basis of increased conviction that the Bentonville, Arkansas-based company has a defensive moat in food and a viable final-mile delivery solution.

Susquehanna's price target for Target was increased from $84 to $95, with Dreher attributing the action to confidence that its omnichannel strategy will gain traction with consumers. (See the analyst's track record here.) 

Susquehanna reiterated a Negative rating on Sears Holdings Corp SHLD and reduced the price target to $2 following an updated to its analysis of the company's net asset value. 

Susquehanna's Retail Ratings 

• Tiffany & Co. TIF: Neutral/$100
• Big Lots, Inc. BIG: Neutral/$55
• Costco Wholesale Corporation COST: Positive/$230
• Dillard's, Inc. DDS: Neutral/$62
• J C Penney Company Inc JCP: Neutral/$3.50
• Nordstrom, Inc. JWN: Neutral/$51
• Kohl's Corporation KSS: Neutral/$64
• Macy's Inc M: Neutral/$25
• Ross Stores, Inc. ROST: Positive/$100
• Signet Jewelers Ltd. SIG: Neutral/$52
• TJX Companies Inc TJX: Positive/$94

See also: Analyst Downgrades Best Buy, Says Retailer Is A 'Victim Of Own Success'

The Thesis

With most companies already having reported holiday sales — which generally account for 80 percent of fourth-quarter sales in retail — the focus is now on the 2018 guidance likely to be issued on earnings calls, Dreher said.

Retailers are likely to discuss a wide variety of investment options for savings from the Tax Cut and Jobs Act, such as lower merchandise prices, a heightened focus on online sales, more service offerings, better shipping terms and more free shipping and increased ad spend, the analyst said.

The analyst said he sees apparel retail entering a period of hypercompetition, with Walmart's branded apparel flagship pages offering tough competition. Improved home and apparel offerings from Target's private label brands are also expected, Dreher said. 

Walmart's competitive moat is its food retailing, while Target's is in value-added design, the analyst said. On Walmart's earnings call, the focus will be on its Parcel acquisition, Dreher said. For Target, the analyst said he's watching how the retailer is inegrating the recently purchased Shipt.

"For these discount stores, their key omnichannel initiative is the final-mile delivery solutions," Dreher said. 

Price Action

Walmart and Target shares are up 49 and 16 percent over the past year, respectively, while Sears Holdings is down 64 percent over the same time frame. 

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