Buying The Dip In Walmart & Target? Why These 3 Retail Stocks Are Better Options

The poor earnings reports from Walmart Inc WMT and Target Corporation TGT were shocking, Ryan Craver, founder of Commerce Canal, told Benzinga’s PreMarket Prep show Friday morning.

"The key reason why I think Walmart and Target shocked me so much was because their inventory increased year-over-year, not the EPS, not sales numbers, not the fact that digital slowed. What shocked me was their inability to slow [purchase orders] as the supply chain opened back up," Craver said.

Related Link: 5 Walmart Analysts React To Mixed Q1 Earnings: 'Particularly Attractive Buying Opportunity'

"If you remember, all of China, most of India, Pakistan, Bangladesh, all of them were closed down for COVID, and all these POs were placed to get the product in as fast as possible because we have the pandemic-fueled spending and everything we brought in was selling. Prices were higher, we were making more EPS, we were making much more revenue, but then as the supply chain started to ease, they never canceled any of the goods that they had bought as it eased," he said.

Buy The Dip? Craver said it's difficult to catch a falling knife in the market, but Walmart and Target shares are looking attractively valued following their respective post-earnings sell-offs.

"Me personally, I haven't been in Walmart or Target for a while now, but I think they look pretty interesting," he said.

Still, Craver said dip buyers should understand Walmart and Target will likely be aggressively discounting products in the second quarter to improve their inventory levels, suggesting second-quarter margins could be under pressure. As China is still experiencing COVID-19 shutdowns, he said these retailers may again be facing inventory shortages at some point this year.

"If you're not going to start to dip your toes into Walmart and into Target — I'd probably go more Walmart than Target because Target was a lot worse than Walmart — I think you've got to look at those that do a solid job when there is ample inventory and excess inventory in the market," Craver said.

Better Alternatives: He specifically mentioned TJX Companies Inc TJX and Costco Wholesale Corporation COST as being relatively well-positioned among brick-and-mortar retailers. In addition, Craver said Amazon.com, Inc. AMZN is still the gold standard when it comes to investing in e-commerce.

"All of those names have traded pretty poorly as well, so if you want to play in retail, I think you've got to pick either of the two big ones that have had a lot of pain and may have more pain, or place your bets on the winners, which is the Costcos, the TJXs and the Amazons," Craver said.

Kohl's Struggling: As Kohl's Corporation KSS said on its earnings call on Thursday, the first three months of 2022 were strong for in-store apparel sales, with shoppers returning to work and travel.

Craver said e-commerce sales were terrible in the opening quarter, but shoppers have shifted back from in-store shopping to online shopping in April and May.

Craver has been a skeptic of Kohl's and its buyout bid since it was first reported back in January.

"Kohl's is rough. Stay away," he said.

Photo courtesy of Walmart.