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Target crushes Q2 earnings, Lowe's same-store sales drop, TJX net sales beat

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Yahoo Finance's Myles Udland, Brian Sozzi, and Julie Hyman break down the latest quarters and outlook for Target, Lowe's, and TJX.

Video Transcript

JULIE HYMAN: But first, we do want to dig into those retail numbers a little bit more. And we start with Target. Those comparable sales, in a normal time, these would be amazing comp figures of 8.9%. You see here that earnings and sales did beat estimates here.

And we see some of the same trends that were reflected in the Walmart numbers yesterday namely, store visits up for the company, not as many stock-up visits, fewer visits last year that were stock-up visits, more visits this year with people buying less at a time. E-commerce revenue up 10%. But of course, that is much, much lower than it was a year earlier.

And something to keep in mind, guys, when we look at Target's stock reaction here this morning, is the shares are up more than 40% this year going into today's session. So certainly already, there had been some optimism priced in. And Brian, I'll go to you first, because I know that you had the chance to hear from some executives of Target. It seems like there was a lot of optimism going into this earnings report on the part of investors and analysts.

BRIAN SOZZI: Yeah, I guess I'm the Target whisperer here. And you're wondering-- those are good points, Julie, and if you're an investor here, you're wondering, what in the world is going on? Target really blows it out of the water, or, how I mentioned on my story right now on Yahoo Finance, clobbers estimates across the board, and oh, yeah, came out with a new $15 billion stock buyback plan that's not getting a lot of attention this morning. But we dive a little bit more into that story.

A couple of reasons here I think you're seeing the stock sell up. One, gross profit margins down, some inflationary concerns with Target; operating profit margins down as well-- two things right there-- and then three, sure, Target came out. They raised their outlook compared to three months ago. For the second half of this year, they're looking for sales of high single-digit percentage. Previous, they were looking for a mid to high single-digit increase.

I think the Street actually wanted more there. That's what the Street does. It's very piggish. It wants bigger gains, especially for Target that has been crushing in the past year. And then full-year operating margins for Target, now seen at 8% or higher, previously they were looking for 7% to 8%.

Now, I did have a chance to talk to Brian Cornell the CEO of Target, on a media call. And he is telling me, or he did tell me, that back-to-school shopping season is off to a very strong start. He's saying, "We're seeing a really strong start, and that's continued as we move into the third quarter. I think it's going to be a really robust back-to-school and back-to-college season." The market says it doesn't care just yet. But he is at least saying that consumer spending remains pretty solid.

That's what I heard from Walmart's CFO Brett Biggs yesterday. But again, the market says, your back half of the year-- Target, Walmart, Costco, BJ's, you name it-- might look different than the first half because of inflation, because of the COVID variant, and because there are no more stimulus checks out there.

MYLES UDLAND: Yeah. And I think when you look at the quarter, you look at the commentary that really, to me, gives us the most color within this release, they talk about the higher freight costs. They also talk about higher merchandise costs, pressuring margins there. Our former colleague Sam Ro also pointed out there that they see the benefit of low markdowns within their business.

But ultimately here, I think this is about a sector-level question that the market seems to be asking itself. Particularly after that Home Depot quarter, just the question around, as you mentioned, Sozzi, with no more stimulus checks going out there, what's the state of the retail trade? We saw apparel as another strong part of the retail sales report earlier this week.

How much more does that have to go here? Because as a group-- and again, on an individual basis, Walmart, Target, Home Depot, these are stocks trading pretty much at record highs, and they've had tremendous runs over the last year. But as a group, is there a broader question being asked by investors of where the retail trade goes from here as a monolithic trade?

And everyone is going to come on here and tell us every retailer's created different. And we all accept that. But on the same-- on the other side of that, you also see at various points in time-- at almost all points in time-- sectors and styles and groups trade together. And I think for the retailers today, for those individual stocks, for that stock style as a group, I think you have some different questions being asked by investors.

BRIAN SOZZI: Yeah. We talked a little bit about this yesterday. If you're an investor or a trader in these retail stocks, you're always thinking about, what is the next potential catalyst? So you have Target out here this morning saying, hey, back-to-school, it's off to a good start. We expect a really good back-to-school season.

But let's keep in mind. There really was no back-to-school shopping season last year. So year-over-year, things will look OK. In terms of catalyst, really the only catalyst near-term, maybe for a month or so, is to the downside. Perhaps sales have started off well, but they slow as the variant concerns only grow. We've seen weakening retail sales. We've seen weakening consumer confidence.

So it's hard to see, to your point, Myles, that upside catalyst perhaps until maybe a month before Black Friday, believe it or not.

MYLES UDLAND: Yeah. And look, when you look at the XRT ETF as, again, a very simple way to kind of put this retail trade idea into some kind of a broader context, the XRT was trading at $50 a little over a year ago, fall of last year. And the XRT right now, the ETF's trading at $92. So we've had a nice run, but it's pretty much been flat really since May. Early May, we were around 95. Yesterday, ETF was off almost 3%, again, following those results we got before the open on Tuesday's session.

But again, it's been a flattish trade after having been a really strong part of the market. Obviously, reopening, you have consumer stimulus, all that stuff coming through. And so now, Sozzi, you ask, what's the next catalyst? I think maybe it goes back to what's the favorite thing people love to come on here and tell us?

Stock picker's market. There you go. And you can go through and pick your own individual names instead of just buying the sector as a whole.

BRIAN SOZZI: What garbage.

JULIE HYMAN: Well, and of course, remember, when you're talking about stock picking or whatever--

MYLES UDLAND: It's always true. It's always true because--

JULIE HYMAN: It's always true, of course. Stocks always go up, broadly, and it's always the stock picker's market. They're both true.

What's also-- I mean, keep in mind with retailer, it's a sort of underowned portion of the market as a percentage of the whole. If you look-- unless you consider Apple a retailer, which, of course, some people do. But on a relative basis, more people own, say, large cap tech, certainly, than they do most of these retailers.

One other point I wanted to make has to do more broadly with consumer spending. And it has to do with the chart that, Soz, you flagged this morning from Goldman Sachs. They were looking at various measures of consumer spending and saying that that number is now at 98.9% of the pre-virus level, which sounds great, except that it was an average of 101% in July. So just another way--

What I think is also interesting about that number is that thus far, these retailers are saying that the delta variant is not slowing the spend that they are seeing in their stores. But if you look at the most macro levels of consumer spending, which, of course, isn't just on retail, it's on all kinds of stuff, that that number is starting to kind of come down a little bit. So that's something that I think we should continue to keep an eye on.

Also, Soz, did you want to mention something about that chart?

BRIAN SOZZI: Yeah. You know, I'll just quickly add, too. I think if you're a trader or investor, you're seeing these initial moves in retail on their earnings, and you think, wow, we're headed back to a place of doom and gloom and malaise-- that's not necessarily the case. These retailers are still putting up some very strong numbers. Household savings rates are very high. People are returning to work.

So there are good things here. We're not back in the same situation we were a year ago. It's just really a function of a lot of these retailers. Their profit margins are coming off their peaks. And that is happening when their valuations are really near five- to seven-year record highs. And that's not a good combination.

JULIE HYMAN: So let's move to Lowe's, guys, because this is a stock that's actually been going up this morning. It raised its full-year forecast. And I think, really, the big contrast is here is that whereas there was a lot of high hope going into Target, that was not the case with Lowe's, and particularly so after Home Depot's numbers yesterday.

So the fact that Lowe's is coming out here beating estimates, as you can see there on the top and bottom line, raising its forecast. And it is less exposed to the professional side of the business than is Home Depot, but it is trying to increase that reliance, because that's an area that has been relatively strong. And that seemed to be one of the things that, perhaps, helped out Lowe's in the quarter.

It says revenue this fiscal year will be about $92 billion. Its previous forecast was $86 billion, which is a forecast that dates from December. It's same-store sales were down, 1.6%. So again, it's interesting here that we are seeing the stock go up. That decline was a little bit smaller, though, than had been estimated.

So overall here, interesting to see the diverging reactions of a Target versus a Lowe's in terms of this. Myles, I know that you're looking at housing, which we're going to talk more about in the next segment. But, you know, Lowe's, not-- same-store sales were down. But, I don't know, it's all an expectations game anyway.

MYLES UDLAND: Yeah, well, this is more of a Home Depot market than it is a Lowe's market. So I'll admit my bias there. But again, it kind of comes back to the story around what the stock has done and the reaction we're seeing to guidance that is upgraded, yes, but a sales pace that is expected to slow down-- $92 billion in sales for the full year. In the most recent quarter, they record $27 billion of sales. So we're still looking for a deceleration in the annualized rate as we get towards the end of the year.

And, you know, this is a stock that peaked back in May at $210 a share or so and has been not-- hasn't been doing a lot since then off-- right around 10% from that high. So, again it's sort of been a, what is the next leg of this story?

And I think you mentioned a little bit more levered to the DIY market, perhaps, than to the pro market. They called out Lowes.com sales were still positive in the most recent quarter of 7% after lapping a quarter in which they were up 135% there. But ultimately, I think, again, a trade that has had traders asking some questions of it.

And sure, this morning, stock is up 3%. But over the last four months, I think still a lot of outstanding issues here, Sozzi, to work through in terms of thinking, you know, why would Lowe's go X percent higher, so on and so forth.

BRIAN SOZZI: Yeah. I think you have to take a really-- just approach this quarter and the market reaction cautiously. Let's be hesitant to anoint Lowe's the most amazing retail trade in the market right now because the stock popped really on their outlook.

And regarding that outlook, they raised their sales outlook for the full year by $6 billion, yet they only took up their operating margin guidance by 20 basis points. So you would have thought if they're going to lift their sales outlook by that much billions of dollars, would be seeing more flow through to the profit line. And the fact is, they're not.

Because like Home Depot yesterday, they are seeing a good bit inflation. Their gross margins were down in the quarter 30 basis points. And also, if you're trading this name right now-- keep in mind what we saw from Home Depot yesterday. The stock came out of the gate down a little bit, but really sold off on the earnings call. And why did it do that?

Home Depot warned they saw sales declines in four categories-- that has not been the norm for Home Depot-- warned of cost pressures. I wouldn't be surprised if Lowe's says the same thing on its earnings call today.

JULIE HYMAN: And just quick, one quick note on the margins I thought was interesting, a comment from Keith Hughes over at Truist stood out to me that said, operating margin was actually the highlight of this past quarter driven by SG&A savings. So we'll see if that can be maintained for the full year, to your point, given that they didn't update that part of the guidance.

Let's talk about TJX as well. Now, TJX reported that it's open-only store comps rose by 20%. You see here bottom and top line, beat estimates. In particular, that sales beat is what has been helping the stock here this morning. They also reinstated the buyback that they had suspended before, and also increased their buyback range.

So all of that seems to be helping the shares. I mean, what's interesting to me about TJX is, TJX has not really participated in the whole e-commerce boom as have other companies, because part of the deal with TJX is, you go into the store, you thumb through a lot of crap to find the fun thing that you want, and sort of that that bargain hunting situation here.

And the CEO of TJX Ernie Herrman said, we are confident that when more customers are comfortable with in-store shopping, we'll be in a good position-- great position to continue gaining market share as we have for many years. So he says "when more customers are comfortable." So it sounds like the traffic is not yet back to full level, but that they're waiting for that to be unlocked.

We're also showing that view of HomeGoods, because they own HomeGoods. And they said that the sales there have been relatively robust. You guys, you guys are smiling at me. You know you look to go treasure hunt in the TJX.

BRIAN SOZZI: Hey, I knew this quarter was coming. I'm going to pat myself on the back here. I went about a month and a half ago to pick up a bathing suit, and there was no inventory in the stores. So I'm a medium, and I actually just bought a large, because I couldn't find anything else in the store. Everything was sold out.

So I actually don't fit into these shorts, but I had to buy them anyway, because I needed something for the pool. Nonetheless, TJ Maxx shares have been a dog all year long, guys. Stock's only up 1% year to date, S&P 500 up 18%. All in all, TJ Maxx, not Lowe's, may be the best retail stock trade of the moment right now.

Really blowout quarter across the board-- TJ Maxx, Marshalls, HomeGoods-- profit margins up. Also noting, like Target said to us today, that August is off to a good start. So the back-to-school shopping season looks to be off to a good start for TJ Maxx as well.

MYLES UDLAND: I went to a HomeGoods, they were busy. That's all I got. That's all I got. I was in there for--

JULIE HYMAN: No reaction. I'm just picturing, like, the cinching, the cinching that has to happen on the drawstring waist of--

BRIAN SOZZI: It's really embarrassing. I'm not wearing it anymore, but I needed one. What am I going to do, you know? Marshalls right from my house.

JULIE HYMAN: Go somewhere else.

MYLES UDLAND: Right. A Lululemon, Sozzi, a core part of the Brian Sozzi trade? Lululemon doesn't have bathing suits? I actually don't know if they do or not, but--

BRIAN SOZZI: I need it now. I need it now. And I was driving past Marshalls to go pick up my food. That's how it goes.

MYLES UDLAND: Sure.

JULIE HYMAN: That is how it goes.