Walmart raises profit guidance, Target lowers it. What signals are U.S. retail stocks sending?

The performance of the two major discount retailers in the United States showed divergence in Q3, while other U.S. retail stocks generally performed well. However, consumers remain cautious when purchasing large items, expecting greater discounts.

On Wednesday local time, Target released its Q3 earnings report, showing Q3 sales of $25.23 billion, falling short of the expected $25.74 billion, and lowered its full-year adjusted earnings per share forecast from the previous $9-$9.7 to $8.3-$8.9, while the market expectation was $9.57, thus revising the full-year earnings per share forecast from $9-$9.7 to $8.3-$8.9.

Following the earnings report, Target's U.S. stock fell nearly 20% in pre-market trading.

Target stated that the reason for lowering its earnings guidance was mainly due to flat quarterly sales and inventory accumulation.

On the supply side, the company accumulated more products due to port strikes, and the holding costs of the extra inventory exceeded expectations, which eroded profits. On the consumer side, American consumers have reduced spending on non-essential goods such as clothing and home items.

Consumers Remain Cautious, Two Major Retailers Optimistic About Holiday Shopping Season

In stark contrast to Target, in the latest earnings report released yesterday, Walmart, the largest discount retailer in the U.S., raised its full-year revenue guidance for the third time this year: increasing the full-year net sales growth forecast from 3.75%-4.75% to 4.8%-5.1%, and raising the full-year adjusted operating profit growth forecast from 6.5%-8% to 8.5%-9.25%.

Walmart stated that its U.S. division achieved growth across all product categories and income groups, mainly due to increased foot traffic and higher average ticket prices. Additionally, advertising and membership revenues also performed well.

Adam Crisafulli, an analyst at Vital Knowledge, analyzed:

“Target's weak performance highlights that a significant part of Walmart's advantage comes from increased market share.”

“Consumers may be quite 'elastic,' but they remain picky and stingy. Target's poor performance may not bode well for companies like Kohl's, Dollar General, and Dollar Tree.”

Walmart's earnings report also indicated that sales in the daily necessities category remain weak. Walmart's Chief Financial Officer John David Rainey stated that consumers will not abandon their cautious purchasing stance until greater discounts are introduced.

Target's CEO also stated:

"Consumers are becoming increasingly savvy and strategic in their shopping habits... Shoppers are 'willing to seek' discounts and wait for the right moment (to make a purchase)."

Except for Target, the performance of other retailers that have reported results this fiscal quarter has generally exceeded expectations.

Among them, home improvement retailers Home Depot and Lowe's both raised their full-year performance outlook due to increased consumer spending on home renovation products driven by hurricanes and warm weather. However, both companies stated that due to high interest rates and mortgage rates, consumers remain cautious about large-ticket items.

For the upcoming holiday shopping season, both Walmart and Target have expressed optimism.

Target CEO Brian Cornell stated on a conference call that the company's early read on holiday sales is positive, expecting a strong start. Walmart also indicated that the company may further expand its market share ahead of the holiday shopping season, anticipating continued strong growth momentum