WWD Digital Daily

The Walmart/ Target First- quarter Square Off

● Walmart is expected to show more comp growth, but both are struggling in discretion­ary categories.


While the macroecono­mic winds push consumers toward discounter­s like Walmart Inc. and Target Corp., it's Walmart that's been able to make the most of the trend, with its large food business and its success in grabbing more higherend shoppers.

But as the companies reveal their firstquart­er results this week, analysts will be looking for signs of firming in the more difficult discretion­ary categories like apparel.

Michael Lasser, an analyst at UBS, predicted Walmart's first-quarters results on Thursday would show that the company has maintained its momentum and gained share.

“The narrative around Walmart is that not only is it a bastion of safety in this otherwise uncertain world, but it is also a company that is capitalizi­ng on its myriad emerging opportunit­ies as it adapts to a digital landscape,” Lasser said in a research note. “In our view, the company's 1Q results will largely support these views. Its top line was likely supported by inflation, consumer trade-down and share gains, while margins benefited from fewer markdowns and improving supply chain costs, which helped to offset investment­s in wages and technology.”

The analyst said Walmart's gross margins, however, will be pressured by “category mix.”

“We think lapping steep markdowns in its general merchandis­e category, improving supply chain and digital advertisin­g benefits more than offset those headwinds,” he said. “Though, questions whether trends in its discretion­ary categories can stabilize and the consumer backdrop improves enough to achieve its long-term goals of 4 percent sales growth and 4-plus percent operating income growth are likely to dictate the narrative going forward.”

While Target has long had a reputation for grabbing higher-end shoppers, Lasser said Walmart has had an edge lately.

Citing research by Numerator, the analyst said the percentage of households making over $80,000 a year that shop at Walmart rose by about 19 basis points to just over 60 percent last year. In contrast, Target's high-income household penetratio­n rate fell 92 basis points last year and is under 60 percent.

Lasser has Walmart penciled in for 4.5 percent comparable sales growth in its namesake U.S. division for the quarter, while he expects Target to log a much milder 0.5 percent comp increase, after the retailer projected a comp change of up or down in the low-single digits.

Similarly, Morgan Stanley analyst Simeon Gutman is looking for Walmart's comp sales to top Wall Street's expectatio­ns with double-digit increases in groceries and a low- to midsingle-digit comp decline in general merchandis­e.

But Target might have something to prove. “We think the market is looking for a slight comp miss — down low-single digits vs. Street at flat — driven by weaker discretion­ary/general merchandis­e trends, consistent with broader macro choppiness in the quarter,” Gutman said. “On guidance, we think the '23 outlook is likely to be generally reiterated, though it's possible Target could orient its top-line guide to the lower end of the range (down slightly vs. flat at the midpoint currently) considerin­g ongoing discretion­ary weakness.

“Given the stock's tepid performanc­e over the past few months, a slight comp miss with in-line margins and a full-year reiteratio­n is probably a fine outcome for the stock,” he said. “Moving through the year, we think Target's top-line will be more in focus even as much of the recent debate has centered around margins.…This is because sales may come in weaker than expected and could suggest some market share losses, which would be a change in trend from sizable market share gains the past few years.”

Target reports first-quarter results on Wednesday and, according to FactSet, is expected to see adjusted earnings per share drop to $1.77 from $2.19 a year ago.

Walmart is expected to see first-quarter earnings inch up to $1.31 a share from $1.30 a year earlier.

 ?? ?? A Walmart store in Miami.
A Walmart store in Miami.

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