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In a note to clients focusing on Target (NYSE:TGT) and Walmart (NYSE:WMT), Cowen analysts said that while they see a positive outlook for both, the advantage is to Target based on valuation.
“We believe consumer focus on value and grocery, leveling gas prices, and improved grocery margins can drive upside. We remain cautious on softening online trends & inflation likely yielding consumer trade down,” said the analysts.
They explained that expectations are modest for Target as the company clears through inventory overhang, which could drive a positive stock reaction if the company can beat gross margin expectations.
“We are positive on TGT over WMT heading into 3Q given 1) TGT’s compelling valuation as the multiple gap compared to WMT has widened to 8x from the 3-year average of 5x and (2) broader consumer spending resiliency driving consistent spending across discretionary categories,” they added. “That said, key catalysts for WMT include (1) gaining share in grocery, (2) increasing Walmart+ membership penetration, and (3) benefiting from trade down in the $100k+ HHI customer segment. Normalizing gas prices and consistent traffic levels in the sector drive our constructive view on comps for both TGT and WMT. Further, we believe both will provide a better than feared outlook for 4Q as solid consumer sentiment and savings drive holiday sales.”
The analysts also stated that Target’s traffic remains robust on a three-year basis, and they expect positive traffic through FY22E. However, Walmart “is the preferred destination for grocery.”
They concluded that the firm “prefer TGT’s P/E of 13x vs. WMT’s 21x and note the widening multiple gap of 8x versus the 3yr average of 5x.”
