Target and Walmart Clash on Earnings. who will win.

Big box stores Target and Walmart will both report fiscal first-quarter results this week, but many industry watchers are predicting just one winner, as concerns about inflation and budget-conscious consumers continue to dominate retail.

Plenty of analysts are bullish on Walmart’s (stock ticker: WMT) earnings, due Thursday, with estimates for total earnings per share rising 0.9% over the past week, to $1.32, before guiding the company from $1.25 to $1.30.

By contrast, analysts on average expect Target (TGT) to report earnings of $1.77 on Wednesday, a figure that was down 0.8% over the past week.

This difference reflects the fact that Walmart gets more of its money from essential items, like groceries, that consumers can’t skip, while Target’s business leans more toward discretionary categories like home goods and apparel.

Although inflation has fallen, costs are still skyrocketing in recent years, forcing more consumers to make tough choices about their budgets. And given that so many people have already stocked up on merchandise during the pandemic, many Americans are choosing to devote what little leftover money they have to services like dining out and holidays during their shopping spree. That, in turn, has led to lower traffic, and in some cases deep cuts at a time when back-end operational costs like freight are still high, leaving margins vulnerable.

The bottom line is that many people think Walmart is a better bet, given that they sell more non-negotiables, like food and fuel.

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“Walmart is one of the top spots in our coverage,” Jefferies analyst Randall Connick wrote Friday, when it raised its comparative sales estimates for the first quarter above the consensus. At the same time, he lowered his numbers on the target.

RBC Capital Markets’ Stephen Shemish did the same on Monday, writing that he sees “the upside to the consensus.” [and] Earnings per share forecast” for Walmart. By contrast, for Target, it expects “a modest downside to consensus comparable sales and expects earnings per share to be in line with slightly below consensus.”

The outlook can cut both ways: A pessimistic mood heading towards earnings could help set a low, while Walmart may have to work harder.

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However, the target may still face an uphill battle, says David Wagner, portfolio manager at Aptus Capital Advisors, given Wal-Mart’s reputation as a good defensive play in tough economic times. “Target has no historical downside protection…and investors may not try to be with names that are so sensitive to consumer entry into an anticipated downturn.”

He also points out that it’s not just first-quarter estimates that are falling for Target: Consensus earnings for this full fiscal year and the following have fallen recently, which is another reason “it may keep Target in the penalty box for longer.”

Of course, even if Walmart comes out on top as expected, it might not do much for the stock. Not only is Walmart a somewhat crowded name, a fact that both Shemesh and Wagner highlighted, driving its valuation up, but this earnings season hasn’t been particularly quick to reward even solid results.

“[H]”Quality names in general have seen muted reactions so far this earnings season despite relatively strong results, so we don’t expect much in terms of name upside,” Shemesh notes in his note out today.

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Wagner similarly cites “mute reactions despite strong results” this season for his belief that Walmart may find it difficult to move the needle on its stock.

However, the companies’ expectations, not their results, may be the biggest driver of any moves in the stock if this quarter looks anything like the last.

With the picture of consumer health so murky, investors are taking comfort in retailers’ guidance, which is why in February Walmart saw its stock come under fire for dovish comments. Target did the same, but its outlook was still moderately better than some had feared, which, combined with the earnings win, was enough to lift Target.

Write to Teresa Rivas at [email protected]

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