Should Retail Investors Be Worried This Holiday Season?

• Wal-Mart Stores, Inc. WMT and Target Corporation TGT reported mixed Q3 earnings ahead of the holiday shopping season.
• Macquarie sees traffic growth as a positive for both companies, but e-commerce growth remains weak.
• The firm maintains its Neutral rating on Walmart and its Outperform rating on Target.

Holiday shopping season is fast approaching, and two names that are traditionally associated with the holidays are Walmart and Target. In a new report, Macquarie analyst Bob Summers takes a close look at the two retailers and reveals Macquarie’s take on the stocks.

Earnings
Walmart’s Q3 earnings were slightly encouraging for the company, which has lost nearly 30 percent of its market cap in 2015. Summers notes that Walmart is still very early in its turnaround efforts and expectations at this point are relatively low.

Target’s Q3 earnings, on the other hand, gave the market reason for concern over gross margins, inventory and mobile growth. Target reported in-line earnings and same-stores growth, however, and Summers feels that the stock’s sell-off was overdone.

Traffic
In terms of traffic, Walmart posted its third consecutive quarter of sequential traffic growth in Q3, up 1.7 percent from Q2. Target also notched its third consecutive quarter of traffic growth at +1.4 percent. Summers adds that Walmart’s positive traffic numbers could be an early indication that the company’s labor investment initiative is working.

E-commerce
For both companies, e-commerce is likely the key to the future. Relative to long-term annual growth projections in the 20-30 percent range, Walmart’s Q3 e-commerce growth of only 10 percent was underwhelming. Target’s e-commerce sales climbed 20 percent year-over-year in Q3, but declined 10 percent compared to Q2 and fell well short of the company’s 30 percent guidance.

Outlook
Summers reiterated Macquarie’s Neutral rating on Walmart and Outperform rating on Target. The next major catalyst for both companies will be Q4 earnings.

Disclosure: the author holds no position in the stocks mentioned.