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Walmart and Target gear up for a holiday shopping boom

Brian Sozzi gives his latest hot take on which big-box retailers are worth investing in as stores like Target and Walmart could experience a big shopping boom this holiday season despite supply chain disruptions.

Video Transcript

JULIE HYMAN: As we get into earnings season, Brian Sozzi looking further ahead to a couple of companies that report towards the end, along with the other retailers. Talking Walmart and Target and thinking about what people should do with those stocks right now.

BRIAN SOZZI: Yeah, I'm trying to give investors an early holiday gift. And really, this was inspired by a Bank of America analyst, Robby Ohmes. Good note out of him yesterday on Target and Walmart. Longtime retail stock analyst-- really enjoy his work. But look, I mean, Target shares are down 13% since mid-August. You have Walmart stock down 8% since mid-August. And some concerns have been piling up on this space. I mean, pick your poison as to why.

Supply chain concerns-- when you see images, as we have, of stuff just sitting out there in the ocean, un-being-- just unable to get off those ships and get into households, that is a big concern, if you're a retailer. Cautious consumers-- we have seen in recent months, the consumer pulled back just a little bit, compared to how much they were spending in the spring.

And then also, too, broader market picture, we've seen a rotation, really, I would say, into deep value names. And Walmart and Target, not saying that they are super pricey versus the S&P 500, but both stocks have enjoyed a nice run during the pandemic. And their valuations are above their historical averages.

Having said all of that, there are a couple of things here I think investors are missing with both of these companies, which might make them good buys into earnings season and then, ultimately, the holiday season. I mean, Walmart and Target, they're likely to crush it this holiday season.

I know consumers have pulled back a little bit, but you still have a US savings rate, Julie, close to 10%. And you do have significant amounts of wage inflation and, in part, coming from Walmart and Target employees, who will likely go and get all their holiday goods from both of these stores, or one or the other.

Also, too, let's keep in mind Walmart and Target are huge, absolutely huge, and can navigate shipping issues here. They get some of the best deals in the shipping industry. And they are not in the same boat as a lot of those small players.

Then a fun fact pointed out by Robby Ohmes, both of these companies entered the third quarter with very strong inventory positions. Target's inventory, according to Ohmes, was up $2 billion versus 2019 levels. Walmart's inventory was up $3 billion over 2019 levels. What this all means, Target and Walmart saw these supply chain challenges, and they brought a lot of inventory in early so things aren't out of stock and they don't have to significantly raise prices and then turn off consumers.

And then, last but not least, speaking of prices, Walmart and Target are really some of the most sophisticated retailers in the game. They have tons and tons of real-time data. And I do think, because of that access to data and their access to technology and how they use it, they will be better equipped than most retailers to raise prices where they need to, to protect their profit margins.

JULIE HYMAN: And they also, of course, chartered their own ships in some cases, right, which is going to be expensive. So I'm curious if anybody's going to ask about that once we do get to their earnings in their earnings calls.