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How Will the Retail Sector Fare this Holiday Season?
Stock Analysis & Ideas

How Will the Retail Sector Fare this Holiday Season?

‘Tis the holiday season but whether it will be the most wonderful time of the year for the retail sector in the United States remains to be seen.

The National Retail Federation (NRF) remains upbeat about the holiday season and expects that holiday sales in the month of November and December are likely to be worth $843.4 billion and $859 billion, respectively, with growth rates of between 8.5% and 10.5%, compared to 2020.

Let us look at where the major retail players stand before the start of the holiday season even as inflation is rising, and examine how Wall Street analysts feel about these stocks, using the TipRanks stock comparison tool.

Amazon (AMZN)

For e-commerce giant Amazon, the fourth quarter is usually a strong quarter ahead of the holiday season. The company’s 48-hour Black Friday event is set to kick off this month, beginning on November 25 and lasting through November 26. The event will see Amazon offering some deep-discount deals on big-ticket purchases like electronic appliances and gadgets.

But while the company will be offering “more Black Friday deals than ever before,” as the company’s press release proclaimed, it will be also wading through multiple problems in Q4. Difficulties include rising wage costs, global supply chain constraints, shortage in labor supply, and an uptick in freight and shipping costs.

These issues are expected to weigh down on its Consumer business. (See Top Smart Score Stocks on TipRanks)

Amazon’s management elaborated more on these issues at its Q3 earnings call. Brian Olsavsky, Amazon’s CFO, pointed out that while the company is increasing its headcount in the U.S., this has unfortunately coincided with a shortage of available workers, especially in the U.S., leading to rising wages. As a result, Amazon anticipates operating costs to double from $2 billion in Q3 to $4 billion in Q4.

What’s more, in Q4, AMZN expects its net sales to take a hit of around 60 basis points due to foreign exchange fluctuations. Net sales are therefore expected to range between $130 billion and $140 billion. Operating income is projected to break even or go up to $3 billion.

Bank of America analyst Justin Post pegged the Q4 outlook as “disappointing” and anticipates that it will take “a few quarters to optimize costs for new fulfilment centers, higher labor costs, and increasing 1-Day shipping capabilities, but anticipate a big margin snap back in 2023.”

However, the analyst remained bullish on the stock with a Buy rating, citing BAC card data that indicated that AMZN continues to gain online market share and strength in its Amazon Web Services (AWS) segment.

Post has a price target of $4,250 (19.9% upside) on the stock.

Indeed, a look at the website traffic volume data for Amazon.com using the TipRanks Website Traffic tool indicates that unique visitors on all devices are up 7.7% year-to-date. The data provided by SEMRush Holdings (SEMR) further shows that monthly unique visitors are inching upwards by 0.8% month-over-month and totaled 666.7 million in October.

Target (TGT)

Rising inflation weighed on Target’s investors’ minds, too, as they didn’t seem to cheer the retail giant’s impressive Q3 results. The stock dropped 4.7% in yesterday’s trading, following the announcement of its third-quarter results.

Inflationary pressures, including higher freight and inventory costs, dragged down Target’s gross margin rate of 28% in Q3, a drop of 2.6% from the same period a year back.

However, the company’s third-quarter revenues increased 13.3% year-over-year to $25.7 billion, beating the consensus estimate of $24.8 billion. (See Top Smart Score stocks on TipRanks)

Adjusted earnings came in at $3.03 per share, up 8.7% year-over-year and surpassing the Street’s estimate of $2.83 per share.

As the holiday season approaches, in Q4, Target anticipates “high-single digit to low-double digit growth in comparable sales,” according to its press release.

While Michael Fiddelke, Target’s CFO, admitted on its earnings call that it was difficult to ascertain whether the current inflationary pressures were temporary or structural, he was optimistic that “supply chain bottlenecks should ease over time.”

Brian Cornell, Chairman and CEO of Target, commented on these cost headwinds, saying, “As our team face these cost increases, they maintained a guest-first approach and a focus on value while managing overall profitability as well.”

When it comes to inventory, Target was well-positioned as at the end of Q3, “inventory on the balance sheet was more than $2 billion higher than last year, representing growth of about 18% from a year ago,” according to John Mulligan, COO.

While investors remain concerned about inflation, Guggenheim analyst Robert Drbul has a different take. The analyst remained encouraged “by the ongoing strength of Target’s business, its profitability, and cash flow generation.”

The analyst reiterated a Buy rating and a price target of $295 (16.2% upside) on the stock.

Wall Street analysts side with Drbul and are bullish, with a Strong Buy consensus rating, based on 12 Buys and 4 Holds. The average Target price target of $286.79 implies 13% upside potential to current levels.

Walmart (WMT)

Investors do not seem to be impressed with WMT’s strong Q3 results, as the stock slid 4.4% post its earnings.

In Q3 FY22, the omnichannel retailer posted revenues of $140.5 billion, an increase of 4.3% year-over-year, surpassing consensus estimates of $135.6 billion. Adjusted earnings came in at $1.45 per share, beating consensus estimates of $1.40.

Ahead of the holiday season, in fiscal Q4, Walmart anticipates comparable sales of approximately 5%. Its inventory is well-stocked and is up by 11.5%. (See Insiders’ Hot Stocks on TipRanks)

Inflation has been a concern for the retail sector and WMT was no exception, as in Q3 it led to rising supply chain costs and dragged down the gross profit rate for Walmart U.S. by 12 basis points.

C. Douglas McMillon, President, CEO, and Director of Walmart admitted on its earnings call that while WMT had not “seen this kind of inflation in the US for quite some time,” the company would still want to keep its prices low.

Guggenheim analyst Robert Drbul approves this price leadership strategy “in this very dynamic environment” and added that it “is executing its strategy well as demonstrated by its sales performance and EPS upside, despite gross margin declines.”

The analyst was also positive about WMT’s alternate revenue streams including Advertising, Spark Last-Mile Delivery, and eCommerce Marketplace. As a result, Drbul is bullish about the stock, with a Buy rating and a price target of $185 with around 30% upside.

The rest of the Street, however, is cautiously optimistic, with a Moderate Buy consensus rating based on 14 Buys and 5 Holds. The average Walmart price target of $170.95 implies 20.4% upside potential to current levels.

Shopify (SHOP)

Shopify is a provider of essential Internet infrastructure for e-commerce that offers services through subscriptions and merchant solutions. The stock has soared 9.9% in the past five days, bolstered by its exceptional Q3 results.

Its total revenues soared 46% year-over-year to $1,123.7 million, while adjusted earnings came in at $0.81 per diluted share versus $1.13 per diluted share in the same period a year ago.

Gross Merchandise Value (GMV) rose 35% year-over-year to $41.8 billion, while cumulative GMV was $400 billion, doubling from $200 billion in just 16 months.

Amy Shapero, Shopify’s CFO, added on its earnings call that it was difficult to ascertain whether supply chain issues or rising costs had any impact on GMV. (See Analysts’ Top Stocks on TipRanks)

When it comes to its Q4 outlook, Shapero stated, “We continue to expect the fourth quarter to contribute the largest share of full-year revenue and that the revenue spread will be more evenly distributed across the four quarters than it has been historically.”

Elaborating further, Shapero added, “While the commerce market, both online and offline, may be impacted by supply chain delays or increased costs for materials, labor, shipping or advertising in the fourth quarter…we expect our GMV in the fourth quarter to continue to grow substantially faster than the commerce market.”

Rosenblatt Securities analyst Mark Zgutowicz seems to echo this view, saying, “US commerce mix of retail will dip roughly -40 bps [basis points] this year, down from 19% in CY20; however, Shopify will still gain +220 bps penetration of US ecommerce, vs. +330 bps in CY20, by our estimates.”

Moreover, the analyst was “most bullish on significant greenfield paths” like Shopify Fulfillment Network (SFN) and Shopify Pay Installments (SPI). Zgutowicz anticipates that SFN will make up around 20% of the company’s revenue exiting 2023.

As a result, Zgutowicz remained upbeat, with a Buy rating and a price target of $2000 (22.1% upside) on the stock.

Other analysts on Wall Street are cautiously optimistic, with a Moderate Buy consensus rating based on 10 Buys and 9 Holds. The average Shopify price target of $1,671.81 implies 2.1% upside potential to current levels.

Disclosure: At the time of publication, Shrilekha Pethe did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.

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