After Walmart Earnings, Should Investors Be Worried About Target?

Shares of Walmart (NYSE:WMT) sunk nearly 10% on Tuesday after the retailer reported a substantial slowdown in fourth-quarter ecommerce sales. This sluggishness from an industry bellwether will see many investors begin to look ahead and wonder what might be in store from fellow retail power Target (NYSE:TGT) in its upcoming Q4 report.

Walmart posted adjusted fourth-quarter earnings of $1.33 per share, which fell short of the Zacks Consensus Estimate of $1.36. The company’s revenues climbed 4.1% year-over-year in the important holiday period to hit $136.3 billion, topping our estimate of nearly $135 billion. Walmart also saw its U.S. comparable-store sales pop 2.6% (also read: Walmart's (WMT) Q4 Earnings Miss Hurts Stock, Comps Up Again).

But investors clearly saw the retail giant’s ecommerce business as a reason for concern. Ecommerce sales grew 24%, which marks a huge drop from the 50% year-over-year growth rate Walmart achieved in the trailing three periods.

Some of the online sales squeeze can be attributed to a big push for holiday-related items such as TVs taking up too much space at ecommerce warehouses, which led to more everyday items being out-of-stock online. Still, after posting a 44% full-year jump in ecommerce sales this year, Walmart now expects to post ecommerce sales growth of roughly 40% in its upcoming fiscal year.

With all of this said, some of Walmart’s Q4 results have to worry Target investors as the two companies operate in the same retail sphere and attract similar customers. On top of that, both companies have tried to revamp their business models to focus more heavily on ecommerce, which is both costly and difficult.

Target

Those looking to make an earnings play on Target stock should take a look at Walmart’s recent results as well as Target estimates ahead of the company’s Q4 earnings release.

Although Target is often seen as a slightly more upscale option than Walmart, it has also felt Amazon’s (NASDAQ:AMZN) presence and has opted to focus more on remodeling existing locations and expanding online capabilities than opening new locations.

Like Walmart, Target saw its online sales surge last quarter. The company saw its comparable digital sales grow 24% in Q3, which marked five consecutive quarters of 20%-plus growth. If investors are worried that Walmart’s report indicates a similar ecommerce slowdown from Target, the company’s updated fourth-quarter guidance shows that if ecommerce sales do slip, it doesn’t seem like it will be by much.

Target recently announce that it expects to post 3.4% growth in comp-store sales during the holiday quarter. This guidance comes based in large part on 3.4% comparable store sales growth in the vital November and December period, which topped Target’s initial range of 0% to 2% growth. Furthermore, Target now expects that 2017 will be the fourth consecutive year that it posts digital sales growth of 25% or more.

Target investors should be happy to note that our consensus estimate is moving higher on the back of strong analyst revision agreement for both Q4 and fiscal 2017. Based on our current estimates, Target is expected to post fourth-quarter revenues of $22.46 billion, which would mark an 8.57% jump from the year-ago period.

Looking ahead to fiscal 2018, Target will continue to pour money into ecommerce. "We will also remain focused on rapidly scaling up new fulfillment options including Same Day Delivery, which will be enabled by our acquisition of Shipt, and our recently launched Drive Up service," CEO Brian Cornell said in a statement.

The retailer has topped earnings estimates in the trailing three quarters, with an average surprise of 14%.Target is also currently a Zacks Rank #1 (Strong Buy) and sports an overall “B” VGM score.

Target is scheduled to report its Q4 and full fiscal year results on Tuesday, March 6.

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