Why Target and Walmart still have ‘upside’ despite inflation pain, according to BofA

Target (TGT) and Walmart (WMT) may have shed tens of billions from their market caps after reporting earnings recently, but the two retailers may still have a key driver going for them.

According to Bank of America (BAC) Global Research, in-person shopping and current consumer spending dynamics suggest that giants like Walmart and Target stand to benefit.

“After a slowdown in March (given tough stimulus comparisons), general merchandise spending reaccelerated in April to +7% y/y, with 3-year trends continuing to track nearly +40%,” the report stated.

“Moreover,” the analysts added, “we think relative Brick & Mortar spending strength (vs. online) in BAC card data implies upside for WMT and TGT given their dominant US store footprints (vs. Amazon, which has very little Brick & Mortar presence comparatively) from both a same-store sales & margin perspective (given the higher margin profile on in-store transactions vs. online).”

BofA maintained a “buy” rating on the two retailers, with price targets of $190 and $289, respectively.

Walmart and Target both cited inflation and supply chain constraints as the main reasons behind their lower-than-expected profits and lackluster margins in the first quarter. Both stocks cratered this week after reporting earnings.

“We expect TGT to face margin pressure in 1H from deliberate price investments (which should continue to support share gains), ongoing supply chain pressures / other cost increases, and a slight increase in markdown rates vs. last year’s dramatically low levels,” the report stated. “Margin rates should also see pressure from TGT’s investments in both team ($300mn in team investments expected in 2022) and growth capacity (including new sortation centers).”

BofA expects Target’s margins to improve in the second half of 2022 due to easing supply chain issues. As for Walmart, BofA believes high inflation puts discount retailers in a better position to attract foot traffic.

“We think high inflation could drive traffic benefits for Discounters like WMT with strong value propositions & broad/multi-price point assortments (WMT has also historically outperformed in periods of high inflation),” the report reads. “While we believe WMT has maintained competitive price positioning in grocery, significant y/y price increases at WMT (+8% in our Miami Pricing Study) should also be a tailwind to same-store sales.”

MIAMI, FLORIDA - MAY 18: A customer exits from a Target store on May 18, 2022 in Miami, Florida.  The retail store reported a 52% drop in profit for the first quarter, missing Wall Street's forecasts.  The company blamed higher expenses due to continued supply chain disruptions as well as the high inflation rate.  (Photo by Joe Raedle/Getty Images)

A customer exits a Target store on May 18, 2022, in Miami, Florida. (Photo by Joe Raedle/Getty Images)

Overall, BofA aggregate credit and debit card data suggested that consumers are continuing to spend in spite of the inflationary environment.

Month-over-month spending growth accelerated in April across all income cohorts, BofA found. In April, spending by lower-income consumers (<$50,000) increased by 0.7% while middle-income ($50,000 to $125,000) consumer spending increased by 3.2% and upper-income (>$125,000) consumer spending increased by 5.6%.

Thomas Hum is a writer at Yahoo Finance. Follow him on Twitter @thomashumTV

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