Retail Earnings Showdown: Wal-Mart Vs. Target

Jefferies sees Wal-Mart Stores, Inc. WMT's second quarter same-store sales ahead of the Street and in-line on EPS, while maintaining its sales and EPS estimates for Target Corporation TGT.

Wal-Mart

Wal-Mart is expected to announce its second quarter results on August 18, while Target reports on August 17. Street expects EPS/revenue of $1.02/$120.34 billion for Wal-Mart and $1.12/$16.17 billion for Target.

For Wal-Mart, Jefferies thinks the U.S. comp stores sales momentum was carried over from the first quarter to the second quarter. The brokerage maintained its estimate for a 1.5 percent increase, modestly ahead of guidance for +1.0 percent. The EPS is expected to be in line with the consensus.

"Our local retail store checks continued to show strong execution with consistency across the market," analyst Daniel Binder wrote in a note.

Meanwhile, the analyst expects a small increase in retail spending over the next few quarters due to the increase in the wages of lower income consumers.

Binder has a Buy rating and $85 price target on Wal-Mart.

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Target

For Target, Binder projects EPS at $1.12, which is a penny below the Street, but in line with management's guidance of $1.00-$1.20. Target set a comp store sales plan of 1.5-2.5 percent for the year, but expected to be flat to down 2 percent in the second quarter, based on a slowdown at the time of the first quarter report in mid-May.

"We are maintaining our -1% estimate as our field checks looked choppy. We think May was particularly soft with a nice rebound in June and then some deceleration in July. Stores generally looked good and we think there was a focus on expense management in the sluggish environment," Binder highlighted.

Binder has a Hold rating and price target of $72 on Target shares.

Comparison

Answering why Target should be a bigger multiple discount to Wal-Mart, Binder said "we think the market is anticipating an upward revision cycle in WMT EPS and a downward revision cycle in TGT EPS, both of which already are underway."

Further, the analyst noted that the market views the Wal-Mart's heavy online spending would better position the company versus Target over long-term. In fact, Target grew EPS by 22.1 percent over the last 5 years, while WMT EPS grew only 12.8 percent.

"We aren't ready to say the scales will tip the other way over the next five years as dramatically as what we saw in the last five years. However, we think the market is starting to view WMT's earnings as temporarily depressed and with progress recently, is gaining confidence and awarding a higher multiple," Binder added.