Target's (TGT) Holiday Performance Turns Walmart (WMT) Investors Green

Christmas came late for Target (NYSE: TGT) investors but it didn’t disappoint.

The retailer reported November/December comparable sales growth of 3.4 percent, compared with the expected range of 0 to 2 percent. It also raised its fourth quarter and full-year 2017 EPS guidance due to stronger-than-expected sales, along with recently-enacted federal tax reform.

Target shares surged on the news, climbing over 3% intraday to a six-month high near $70 per share.

Target also released impressive initial 2018 guidance that calls for a low single-digit increase in its 2018 comparable sales and year-over-year stability in EPS generated by its core business, excluding the benefit of federal tax reform.

Robert F. Ohmes, an equity analyst at Bank of America Merrill Lynch with a Buy rating on the stock, sees more long-term tailwinds, and he thinks tax reform will only strengthen the current cycle and benefit retailers like Target.

“… the demographics of Millennials that have not built wealth yet and are now taking on rising financial obligations combined with retiring Baby Boomers shifting to lower fixed incomes should drive strong growth of ‘budget-conscious consumers’ looking for discount store prices and offerings,” wrote the analyst.

The housing cycle, supported by the maturing of Millennials, and competitor store closings are also seen as tailwinds.

Walmart (NYSE: WMT) is another potential beneficiary of the cycle described by Ohmes. The company hasn’t released holiday sales performance yet, but results from Target have investors envious, with hopes high.

Christopher Horvers, a JPMorgan analyst, commented on read-through for Walmart.

“Based on our conversations, we believe that investors have been expecting WMT to post comps in the 2.0-2.5% range. However, strong results from TGT, on the back of upside reports from the department stores, are likely raising that bar. Certainly, WMT has a lower beta assortment than TGT and KSS, but one-third of annual sales is 'discretionary' and that mix peaks in 4Q. Given WMT has outcomped TGT every quarter since 1Q16, we think a 3% comp could become the expectation and are interested to see how the WMT vs. most of retail (including TGT) shifts.”

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