Target TGT and Walmart WMT may have shed tens of billions of market caps after reporting earnings recently, but the two retailers may still have a key driver going for them.
In-person shopping and current consumer spending dynamics suggest that giants like Walmart and Target are going to benefit, according to Bank of America BAC Global Research.
After a slowdown in March due to tough stimulus comparisons, general merchandise spending increased by 7% in April to 7% y, with 3 year trends continuing to track nearly 40%, according to the report.
The analysts think relative Brick Mortar spending strength compared to online in BAC card data suggests upside for WMT and TGT given their dominant US store footprints compared to Amazon, which has very little Brick Mortar presence compared to online BofA, which has a higher margin profile on in-store transactions and price targets of $190 and $289.
Inflation and supply chain constraints were the main reasons behind their lower-than-expected profits and lackluster margins in the first quarter, according to Walmart and Target. Both stocks cratered this week after reporting earnings.
The report stated that TGT will face a margin pressure in 1 H from deliberate price investments, which should continue to support share gains and supply chain pressures, and a slight increase in markdown rates compared to last year's dramatically low levels. Margin rates should see pressure from TGT investments in team investments expected in 2022 and growth capacity including new sorting centers, as well as the ease of supply chain issues, which is why BofA expects Target's margins to improve in the second half of 2022. BofA believes that high inflation puts discount retailers in a better position to draw in foot traffic.
We think high inflation could lead to traffic benefits for Discounters like WMT with strong value propositions broad multi-priced assortments. WMT has historically outperformed in periods of high inflation, the report reads. While we believe WMT has maintained competitive price positioning in grocery stores, a significant yy price increase at WMT 8% in our Miami Pricing Study should be a tailwind to same-store sales. Consumers are continuing to spend despite the inflationary environment, according to BofA aggregate credit and debit card data.
In April, spending growth accelerated across all income cohorts, according to BofA. In April, spending by lower-income consumers increased by 0.7%, while middle-income $50,000 to $125,000 consumer spending increased by 3.2% and upper-income $125,000 consumer spending increased by 5.6%.