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Worried About Retailers? Discount Outlets Might Be A Safe Haven

Wal-Mart Stores, Inc. NYSE:WMT, Target Corporation NYSE:TGT - Worried About Retailers? Discount Outlets Might Be A Safe Haven

After a dismal earnings season by department store retailers, several discounters are scheduled to report earnings this week. Deutsche Bank’s Paul Trussell mentioned that he was cautiously optimistic of the discounters meeting the lowered expectations and reiterating full-year guidance.

“More importantly, we think management teams will have more positive (if guarded) commentary around the state of the consumer than dept. stores,” analyst Paul Trussell wrote.


Trussell maintained a Buy rating for Costco Wholesale Corporation COST 1.04%, while reducing the price target from $198 to $196, citing lower gas margin forecasts.

The focus of Costco’s results is likely to be on MFI and margins. The company’s top-line growth is expected to be driven by its strong membership growth and the transition of Visa Inc V 1.16%.

The analyst expects Costco to outperform other players in retail in terms of traffic, with its membership fees providing a safety net to earnings and steady cash flows.

The EPS estimate for F3Q16 has been reduced from $1.24 to $1.23. The company’s quarterly sales are estimated to increase 2.9 percent y/y to $26.3 billion and MFI is expected to be up 4.4 percent.

“We assume EBIT down 2 bps YOY at 0.91% (ex. MFI) based on GPM up 31 bps more than offset by 33 bps of SG&A deleverage. We expect core GPM up 15 bps driven by 18 bps of benefit from lower gas prices,” the Deutsche Bank report stated.


The analyst maintained a Hold rating for Target Corporation TGT 2.42%, while raising the price target from $81 to $84. He expects the company to report in-line 1Q results and believes it can achieve its FY16 EPS guidance of $5.20-$5.40, provided it begins the year on a solid note.

“We are now modeling 1Q EPS of $1.18 (from ($1.21), two pennies below the Street at $1.20 but still in-line with guidance of $1.15-$1.25. We now expect SSS up 1.5% (from 1.8%), in-line with guidance of the lower end of 1.5%-2.5% and below the Street at 1.7%,” the report mentioned.


Trussell maintained a Hold rating for Wal-Mart Stores, Inc. WMT 1.29%, while raising the price target from $62 to $64. He added that although the company is likely to report in-line 1Q results, several near-to-medium term headwinds, including food deflation, investment in labor and e-commerce and price investments, are expected to stifle EPS growth.

“We are modeling 1Q EPS of $0.86, which is $0.02 below the Street and vs. guidance of $0.80-$0.95. Our forecast is driven by revenue down -1.9% despite WMT U.S. SSS up 0.5% which is in-line with guidance for 0.5%,” the analyst wrote.

While Wal-Mart many generate gross profit margin expansion of 5bps y/y, this could be more than offset by 88bps of SG&A deleverage, leading to a 78 bps contraction in its EBIT margin to 4.2 percent.

While saying that Target and Wal-Mart are likely to offset shortfall in comps by SG&A, the analyst commented that Costco was preferred due to its “numerous near- and long-term catalysts, even if traffic has softened (but remains ahead of retail regardless).”

May 2016RBC CapitalInitiates Coverage onUnderperform
Apr 2016Goldman SachsMaintainsNeutral
Mar 2016BarclaysMaintainsEqual-weight

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