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Wal-Mart and Target: What You Need to Know Ahead of Earnings


This morning the government released advanced retail sales data for the month of October. Total sales came in down 0.3% from September but up compared to October of last year. There are a few good reasons to ignore that data entirely. First, hurricane Sandy likely messed with the numbers. Second, the margin for error is greater than the decline. Third and most importantly, Wal-Mart (WMT) and Target (TGT) both report third-quarter earnings in the morning.

Between them, Walmart and Target are the American consumer. They capture every demographic that appreciates a good value on decent products. That's all of us. As indicators of the economy, the two discounters are outperforming the collective mood of consumers. Each stock is up more than 20% for 2012, pushing all-time highs.

Hitha Prabhakar, retail analyst and author of Black Market Billions, agrees. She describes Walmart as a "stalwart" of the S&P 500 and one of the most important and powerful companies in existence, pointing to the fact that WMT CEO Mike Duke is among the select group of American executives being invited to the White House to discuss the budget deficit with President Obama today.

Analysts expect WMT to report 10% earnings growth on a staggering $115 billion in revenue. Target is expected to come in at 78 cents per share on a relatively modest $16.4 billion in sales. Analysts will be watching for fourth quarter guidance in the near term, of course. Bigger picture, Prabhakar says the war is being fought someplace you might not expect.

"Walmart and Target have the strategy where they're having groceries come in," says Prabhakar. "They're going to focus in on that." The thinking is to bring the customers in for the staples and you can sell them almost anything else. It's working well enough for both companies that they are taking our shelf space from less productive items and putting it into food, despite the generally lower margins on groceries.

Forced to pick one of the two stocks, Prabhakar says "all of my eggs, honestly, are in WalMart." An apt choice of words. Hopefully for WalMart shareholders the company won't report rotten results in the morning.