Upcoming Earnings: Target And Wal-Mart Take The Stage This Week

It’s been a busy two weeks for retail earnings. After most of the major department stores reported last week, this week brings reports from big-box retailers Target Corporation TGT and Wal-Mart Stores Inc WMT. TGT reports earnings before the opening bell on Wednesday, November 15 and WMT opens the books the following morning.

For the third quarter, TGT is expected to report adjusted earnings per share (EPS) of $0.85, down from $1.04 in the prior-year quarter, on revenue of $16.52 billion, up slightly from $16.44 billion in the same period last year, according to third-party consensus analyst estimates. WMT is expected to report $0.97 in adjusted EPS, down a penny compared to the prior-year quarter, on revenue of $121.02 billion, up 2.3% year-over-year.

Comp sales (sales at stores open for a year or more), traffic, and online sales are likely to be three of the areas that analysts hone in on when they report third-quarter results.

For the second quarter, TGT reported comp sales increased 1.3% year-over-year, propelled by a 2.1% increase in traffic and negatively impacted by a 0.7% decrease in average transaction. This was the first quarter in a year that TGT posted positive comp sales. Looking at online sales, TGT reported comparable digital channel sales increased 32% year-over-year. For the third quarter, management said they expect comp sales to be in line with the first two quarters of the year and adjusted EPS ranging between $0.75 and $0.95.

Last month, TGT announced it planned to increase investments to remodel 1,000 stores by 2020, up from around 600 it had originally planned. TGT didn’t provide any details on how the renovations would impact its bottom line. At the same time, TGT said it is accelerating its pace of opening new small-format stores. Analysts might be looking for more details on how the additional investments might impact the company’s margins.

For WMT’s second quarter, it reported comp sales in its U.S. segment increased 1.8% year-over-year, driven by a 1.3% increase in traffic and a 0.5% increase in average transaction, putting revenue at $78.74 billion in its domestic operations. WMT reported revenue in its e-commerce segment grew 60% year-over-year. For the third quarter, management said they expect adjusted EPS between $0.90 and $0.98.

WMT operates internationally, which results in it being impacted by foreign exchange rates, whereas all of TGT’s locations are in the U.S. In the second quarter, WMT reported sales in its international segment decreased 1% year-over-year to $28.3 billion. Excluding the impact of foreign exchange, sales increased 2.5% year-over-year to $29.3 billion.

Like many retailers, TGT and WMT are ultimately trying to strike a balance between their brick-and-mortar locations and e-commerce. Both companies recently partnered with Google to offer products to shoppers on Google Express and incorporate new shopping features into Google Assistant, the company’s intelligent personal assistant. Both TGT and WMT indicated they expect to continue to deepen the relationship in the future. In recent quarters, the two companies have announced a combination of acquisitions and internal investments to boost their e-commerce capabilities, while rolling out more private-label brands at the same time. 

Lastly, as analysts and investors digest this quarter’s report, they’ll likely be focused on guidance for the upcoming quarter and how the companies are planning on driving customers to their stores during the busiest time of the year for retailers. The dynamics around Black Friday and Cyber Monday also continue to change as more customers have opted to shop online and skip the stores. 

FIGURE 1: TARGET YTD PERFORMANCE. Target (TGT) is charted above, compared to Wal-Mart (WMT) as the pink line and the S&P 500 (SPX) as the teal line. Chart source: thinkorswim^® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Target Trading Activity

TGT is still a ways off from its 52-week high of $79.33 it hit at the end of November last year, although shares have recovered a bit from their mid-year low of $48.56. So far this year, shares are down 16.98% after closing at $59.78 yesterday. Around TGT’s upcoming earnings release, options traders have priced in about a 3.6% potential stock move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform.

In short-term options trading at the November 17 expiration, calls have been active at the 60 and 62.5 strike prices. There’s also a sizable amount of open interest at the 65 strike call, despite the stock being quite a ways off from that level. On the put side, trading has been concentrated at the 60 strike, right at the money. Implied volatility this morning is on the high end at the 97^th percentile.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Wal-Mart Trading Activity

WMT has moved sharply higher since the start of October, when it was trading in the high-$70s. So far this year, WMT is up 32.52% and shares hit a new all-time high of $91.98 before pulling back to close at $90.99 yesterday. Options traders have priced in a 3% potential stock move in either direction, according to the Market Maker Move indicator.

At the November 17 expiration, short-term options trading has been concentrated at the 87.5 and 88 strike calls, while puts have been active at the 90 and 91 strikes. There’s substantial open interest at the 90 strike put with 44,067 contracts open, almost double the highest open interest on the call side. WMT’s implied volatility is also at the high end of the range at the 95^th percentile as of this morning.

Looking Ahead

On top of TGT and WMT, Best Buy Co Inc BBY also reports earnings this week, releasing results before market open on Thursday, November 16. For the most part, earnings season has pretty much winded down for this quarter.

Looking at economic data, October’s Consumer Price Index (CPI) comes out on Wednesday morning, along with October’s retail sales crude oil inventories. On Friday, we’ll get a look at the housing market with building permits and housing starts. Make sure to check out today’s market update to see what else is happening.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.