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Earnings Preview: WMT and TGT Report First-Quarter Results This Week

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May 16, 2017
Image of Shopping Aisles Similar to Wal-Mart and Target
iStockphoto.com/bugphai

A majority of the companies in the S&P 500 (SPX) have reported earnings, 450 out of 500 as of last Friday according to CNBC, but there are still plenty of big names left to report, especially in the retail sector. Many analysts are painting a bleak picture for the sector following recent results from retailers Macy’s (M), Nordstrom (JWN), Kohl’s (KSS) and J.C. Penney (JCP). Despite some of the big names missing expectations, April retail sales were up 4.5% compared to a year ago, which some are taking as a sign that high consumer confidence is starting to translate into spending.

While it seems like there’s mixed results between economic data and earnings, a big question on many investor’s minds is how brick-and-mortar retailers are positioning themselves for the future as ecommerce sales continue to grow. That same question might be top of mind when Target Corp. (TGT) and Wal-Mart Stores (WMT) report before market open on May 18 and May 19, respectively.

Target Earnings and Options Activity

When Target reports first-quarter results, it’s expected to earn $0.89 per share, down from $1.29 in Q1 2016, on revenue of $15.64 billion, according to consensus third-party analyst estimates. Based on analyst estimates, earnings are expected to drop much more than revenue, which is forecasted to decline just under 3.5% from last year compared to a double-digit drop in earnings. So far this year, the stock is down almost 24% compared to just over a 5% decline in the S&P 500 Retail Index.

According to the Wall Street Journal, Target has focused on investing in internal initiatives instead of spending that money on potential acquisitions. At the end of February, the company announced it would spend $7 billion in capital over the next three years to “to grow sales faster, gain market share, adapt to guests’ rapidly changing preferences and give them even more reasons to choose Target.”

Looking at options activity around earnings, the market has priced in about a 4.7% potential move in either direction for its stock, according to the Market Maker Move indicator on the thinkorswim® platform. In short-term options trading leading up to earnings at the May 19 monthly expiration, calls had higher volume at the 56 and 57 strike prices while volume for puts was higher at the 53 and 55 strikes. As of Tuesday morning, the implied volatility sits at the 100th percentile, as high as it gets.   

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. 

Target (TGT) and Wal-Mart (WMT) Stock YTD Performance

FIGURE 1: BIG BOX RETAIL YTD PERFORMANCE.

Target (gray line) shares are down almost 24% year to date, lagging both Wal-Mart’s (purple line) more than 11% increase over the same period and the S&P 500 Retail Index’s (teal line) roughly 5% decline. 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.

Wal-Mart Earnings and Options Activity

Wal-Mart is expected to report earnings of $0.96 per share, close to the $0.98 earnings per share in Q1 2016, on revenue of $117.65 billion, according to consensus third-party analyst estimates. While earnings are roughly flat to last year, analysts are expecting revenues to increase 1.5% from $115.9 billion a year ago.  The stock is up just over 11% year to date, outperforming the broader retail sector and some of its peers.

Last year the company acquired online retailer Jet.com for $3 billion and so far this year has announced several acquisitions including: shoe seller ShoeBuy, outdoor outfitter Moosejaw, and ModCloth. These recently announced acquisitions as well as last year’s Jet.com are all online retailers.

On last quarter’s earnings call, Wal-Mart CFO Brett Briggs said “Looking ahead, you’ll continue to see us make investments in e-commerce to drive traffic and improve the customer value proposition”. It also recently tested a subscription service similar to Amazon (AMZN) Prime. However, it later announced it would scrap its subscription service in favor of a lower minimum order for free shipping as well as offering discounts for picking up online orders in store.

On the options side, traders have priced in just under a 3% potential stock move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. In short-term options trading leading up to earnings at the May 19 monthly expiration, calls were active at the 77 and 77.5 strike prices while puts were active at the 74 and 75 strikes. As of Tuesday morning, the implied volatility sits at the 38th percentile.    

Target and Wa-Mart Business Divisions Comparison

FIGURE 2: TARGET VS. WALMART.

Target only operates stores in the U.S., whereas Walmart operates a large number of international stores and Sam’s Club locations in addition to its U.S. stores. The Trefis price estimate vs. current market price is as of 5/16/17. TD Ameritrade clients can analyze potential revenue drivers of a stock on the Fundamentals tab on the thinkorswim® platformTrefis information and estimates used in Company Profile are provided by Insight Guru, a separate and unaffiliated firm. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Earnings season isn’t over yet: Alibaba Group (BABA) reports before market open on Thursday and Deere & Co. (DE) reports before market open on Friday.

Good Trading,
JJ
@TDAJJKinahan

NC
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