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Retail companies that are best positioned for the fourth quarter amid supply chain issues

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Robby Ohmes, BofA Securities Senior Retail Analyst, joins Yahoo Finance to discuss the outlook on retail amid supply chain issues.

Video Transcript

ALEXIS CHRISTOFOROUS: Welcome back. All the supply chain disruptions we've been experiencing didn't stop Americans from spending last month. In fact, retail sales jumped to better than expected 7/10 of a percent. But will that momentum last into the holidays? And where are the opportunities right now for investors?

Joining me to talk about it is Robby Ohmes, research analyst at Bank of America. So Robbie, before we get to some specific retail names, I would just love your take on those retail numbers we saw today. And what does that tell us about the state of the consumer as we head to the holidays?

ROBBY OHMES: Well, you know, when I speak to the retailers I cover like a Walmart or Target, the sense I get is the state of the consumer has been kind of consistent with what we saw in the second quarter, which was a very strong consumer.

ALEXIS CHRISTOFOROUS: So which companies are proving to be weathering this supply chain chaos, I guess, we can call it, or a crisis, as some people are calling it? Which companies are best positioned?

ROBBY OHMES: Well, yeah, so let me start by saying, nobody's immune to what's going on out there in the supply chain. And I think different companies have different issues and different magnitudes of issues. We actually designated Walmart and Target as top picks for the fourth quarter. We did that on Monday.

And one of the things we highlighted, the reasoning behind that is we think those two companies are better positioned than maybe many of the other retail companies out there. Some of it has to do with their scale, but some of it has to do with other dynamics that those companies have done to be in a position to have maybe more inventory on average than some of the people they compete with.

ALEXIS CHRISTOFOROUS: And is part of that the fact that these big box retailers, Costco as well, which we didn't mention, have now gotten their own shipping situations so that they can get their own inventory perhaps faster than waiting in line with the rest of the retailers at the ports right now?

ROBBY OHMES: Yeah, I think that's exactly right. You've heard Walmart and Target both talk about that. But there are other things that these companies are doing. If you look at those two companies in particular, Walmart and Target, they both-- their inventories, heading into the third quarter of this year, were already up billions of dollars versus last year, but also billions of dollars versus where they would have been positioned heading into the back half of this year back in 2019.

So they were already planning for a lot of demand and had been bringing things in at a higher level earlier than they would have historically. So I think that's one of the things that's helped them. I think one other thing that I would mention is, in terms of some of the pressures related to, say, internal freight costs, a company like Walmart does a lot of their own trucking, owns their own trucks, has their own drivers. And so they may not be seeing some of the cost pressures that others may be seeing to the same degree, anyways, related to just the labor shortages and things like that that you're hearing about.

ALEXIS CHRISTOFOROUS: How impacted are those companies-- Walmart, Target in particular, because I know you covered them-- when it comes to higher labor costs? Because we know those companies have been among those who have been raising salaries for hourly workers.

ROBBY OHMES: Yes, you know, they have. And in a way, you know, if you go many years back, Walmart was one of the companies that led the way on those in the beginning of these increases you've been seeing over the last couple of years on higher wages. And you saw Target come out with some big increases over the last year and a half. If you look at, say, a Target and Walmart and I would say Costco as well, you've seen a lot of wage increases happening at those companies over the last year and a half.

So, incrementally, they are probably starting to anniversary some of the things that they've been doing and may feel less pressure year over year than maybe some of the other industries or companies that are catching up to levels that they've already gone to. So, in that way, they're better positioned as well.

ALEXIS CHRISTOFOROUS: Mm-hmm. What about valuations of a Target and a Walmart right now? I know their stocks pulled back recently. But do you think that they are looking attractive right now? And I'm wondering what your expectations are when they report earnings this season.

ROBBY OHMES: Yeah, you know, so great questions. You know, look, Walmart and Target are both trading at or, you know, in the case of Walmart, probably around an S&P 500 multiple of around 20 times. Target, I think is trading, you know, a little closer to maybe 17 times earnings. You know, I think that what you could see is that you could see these stocks get above market multiples.

If they do, in fact, not only outperform through the holiday season or the fourth quarter here, as we think they will, in part because of the circumstances on supply chain, but also maintain this stronger momentum both companies have been seeing, you know, really throughout the year to date period, which is they've seen strong traffic, they've seen a return of shoppers to their stores, they've seen very strong momentum in their higher margin-- the general merchandise categories, and they've both seen grocery market share gains that also supports traffic.

So a lot of positive momentum in their business, heading into the back half. We believe if they execute some of their omnichannel strategies well into next year, they could continue to outperform what has been maybe a surprisingly strong US consumer environment in the aggregate.

ALEXIS CHRISTOFOROUS: Robby, before we let you go, I don't believe you cover Macy's, but you do always have your eye on the overall retail landscape. And I'd just like your thoughts on activist investor JANA Partners taking a stake in Macy's, wanting the company to spin off its e-commerce division. Do you think that that's going to be the right move for a company like Macy's, which we know has been struggling?

ROBBY OHMES: You know, it is a great question, but I do not cover Macy's. And I really haven't done any work on that. So I'm going to pass on answering that one.

ALEXIS CHRISTOFOROUS: All right, but thanks so much for joining us and sharing your insights on those big boxes retailers, Walmart and Target. Robby Ohmes, thanks so much.