(Bloomberg) -- Big-box retailers are lagging the broad market this year after reaping gangbusters gains in 2020, but that’s not reason enough to shun the stocks. In fact, these companies stand to get stronger over time, Wall Street analysts say.
Lockdown winners Costco Wholesale Corp (NASDAQ:COST)., Target Corp. (NYSE:TGT) and Walmart (NYSE:WMT) Inc. have been getting little love from investors amid concerns over their future profitability as pandemic-fueled spending drop, at the same that that business expenditures increase and inflationary pressures mount.
While the S&P 500 advanced 4.5% since the start of the year, shares of Target are up only 1.7%, Walmart fell 8% and Costco is down 13%.
“We thought the Covid-environment beneficiaries would tread water, but it has been much worse,” Simeon Gutman, a Morgan Stanley (NYSE:MS) analyst wrote this week.
Still, Gutman said investors focusing primarily on an expected drop in comparable quarterly sales growth for the companies, may be missing the potential longer-term benefits the retailers stand to reap as the country’s economy normalizes. Moreover, the trio of retailers have embarked on aggressive investment programs.
“These mega cap retailers are reinvesting back into their businesses at high rates, paving the way for future growth,” Gutman wrote.
Costco, Target and Walmart are collectively spending more than $20 billion in their current fiscal years, boning up their businesses, aimed at e-commerce fulfillment capabilities, wages, as well as other improvements in a bid to raise productivity.
Capital expenditures and higher labor costs may eat into profit margins in the short-term. But as Gutman said: “On the other side of ‘recovery’ these mega caps should be even better positioned than before.”
Many on Wall Street agree. Costco has 69% of sell-side analysts covering the stock rating it a buy. That figure rises to 71% for Walmart and to 78% in the case of Target. The average 12-month price targets on their shares indicate upside of roughly 13% to 20% from their recent close.
A fresh round of stimulus checks poised to be delivered to many Americans this month also bodes well for at least Target and Walmart, given they were both beneficiaries of the last round, according to Jennifer Bartashus, a Bloomberg Intelligence analyst.
Walmart also stands to gain from a part of the Covid-19 relief bill that includes a continuation of Supplemental Nutrition Assistance Program (SNAP) benefits and both Target and Walmart could capture a larger chunk of so-called stimmy checks as shoppers spend on higher-margin discretionary items, Bartashus said.
An expected deceleration in sales and profit growth in coming quarters could still weigh on the companies’ shares and the question of how they will pivot to operate in an macroeconomic environment in flux, still remains.
Target said gross margins will decline from 2019 levels and that it would be better to compare its earnings this fiscal year to that of more normal years. Walmart disappointed investors by saying its 2021 profits would be hurt by slowing sales and reinvestments.
“We understand that Target may appear to be a victim of its own success as it faces difficult comparisons in 2021, but we look at the business on two- and three-year basis, which should remain strong,” Joseph Feldman, an analyst at Telsey Advisory, wrote in a report following the retailer’s earnings report in early March.
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