Retail companies have faced multiple headwinds of late, including multi-decade high inflation and persistent supply chain disruptions. With recession fears looming, many retail companies have lowered their guidance for the current year. However, not all stocks are expected to be weighed down by the recession. Kroger (KR) has raised its full-year guidance, indicating its ability to survive a recession. However, Target (TGT) and The Gap (GPS) are expected to suffer from poor consumer demand and inventory pileup this year. Let’s discuss.
The economy has been facing several macroeconomic headwinds over the past few months. Inflation hit a new multi-decade high last month, and the Federal Reserve has been trying to tame it through aggressive policy tightening. The Fed has hiked the benchmark interest rates thrice this year, and further rate hikes are in the offing.
Many analysts believe that raising interest rates may lead to the economy slipping into a recession, which is expected to hurt the retail industry significantly. The retail industry is already facing headwinds like supply chain disruptions and soaring prices, due to which consumer demand is taking a hit.
Retail companies are witnessing inventory pileups due to declining demand, shipping delays, and other supply chain bottlenecks. With recession fears looming, consumers are cutting down on discretionary spending, which should further affect the retail industry.
However, there are still investment opportunities in the retail sector. The Kroger Co. (KR) could be a good addition to one’s portfolio as the company beat analysts’ EPS estimate in the last reported quarter and raised its full-year guidance. This indicates KR’s ability to survive a recession.
However, investors should avoid Target Corporation (TGT) and The Gap, Inc. (GPS) due to their weak prospects.
The Kroger Co. (KR)
KR is a food retailing company that owns and operates supermarkets, multi-department stores, and fulfillment centers. The company manufactures and processes some food for sale in its supermarkets.
The company also owns store equipment, fixtures, leasehold improvements, and processing and food production equipment. It offers online personalized orders, pick-up at the store, and home delivery services.
On June 20, 2022, KR announced that its customers would get more access to electric vehicle charging stations at different KR locations. KR’s Senior VP and Chief Information Officer Yael Cosset said, “Increasing our customers’ access to EV charging stations at convenient Kroger locations supports our collective transition to a lower-carbon economy. We are leveraging technology and innovation to reduce our greenhouse gas emissions and are offering customers easy ways to live a more sustainable lifestyle. “
KR’s sales increased 8% year-over-year to $ 44.60 billion for the first quarter ended April 30, 2022. The company’s operating profit increased 86.9% year-over-year to $ 1.50 billion. Also, its net income attributable increased 374.2% year-over-year to $ 664 million.
For the full-year 2022, the company guided“We now expect identical sales without fuel to be in the range of 2.5% to 3.5%, adjusted FIFO operating profit of $ 4.3 billion to $ 4.4 billion, and adjusted net earnings per diluted share to be in the range of $ 3.85 to $ 3.95.”
Analysts expect KR’s EPS for fiscal 2023 to increase 4.3% and 5% year-over-year to $ 3.84 and $ 144.73 billion, respectively. It surpassed Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 22.2% to close the last trading session at $ 48.40.
KR’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It has a B grade for Growth, Value, and Quality. It is ranked #5 out of 38 stocks in the A-rated Grocery/Big Box Retailers industry. Click here to see the other ratings of KR for Momentum, Stability, and Sentiment.
Target Corporation (TGT)
TGT is a general merchandise retailer selling products through its stores and digital channels. The company sells an assortment of available merchandise and food. The company’s products include apparel and accessories, beauty and household essentials, food and beverage, hardlines, home furnishing, and décor.
On March 1, 2022, TGT announced its plan to invest up to $ 5 billion to continue scaling its operations in 2022. The investment will go into its physical stores, digital experiences, fulfillment capabilities, and supply chain capabilities that further differentiate its retail offering and drive sustained growth.
Chief Financial Officer of TGT, Michael Fiddelke, said: “We see substantial opportunities to build on our core capabilities to drive deeper guest engagement and long-term growth.”
For the fiscal first quarter ended April 30, 2022, TGT’s total revenue increased 4% year-over-year to $ 25.17 billion. The company’s net earnings declined 51.9% year-over-year to $ 1 billion. Also, its adjusted EPS came in at $ 2.19, representing a decrease of 40.7% year-over-year.
For the quarter ending July 31, 2022, TGT’s EPS is expected to decline 76.6% year-over-year to $ 0.85. However, its revenue for the quarter ending July 31, 2022, is expected to increase 4.3% year-over-year to $ 26.15 billion. It surpassed consensus EPS estimates in three of the trailing four quarters. Over the past nine months, the stock has lost 40% to close the last trading session at $ 144.70.
TGT’s POWR Ratings are consistent with this mixed outlook. The company has an overall rating of C, which translates to Neutral in our proprietary rating system.
It has a C grade for Momentum and Stability. It is ranked #34 in the same industry. Click here to see the other ratings of TGT for Growth, Value, Sentiment, and Quality.
The Gap, Inc. (GPS)
GPS is an apparel retail company that offers apparel, accessories, and personal care products for men, women, and children under the Old Navy, Gap, Banana Republic, and Athleta brands.
GPS ‘net sales declined 12.8% year-over-year to $ 3.47 billion for the first quarter ended April 30, 2022. The company’s net loss came in at $ 162 million, compared to a net income of $ 166 million in the year-ago period. Also, its loss per share came in at $ 0.44, compared to an EPS of $ 0.43.
Analysts expect GPS ‘EPS for the quarter ending July 31, 2022, to decline 74.3% year-over-year to $ 0.18. Its revenue for fiscal 2023 is expected to decline 5.2% year-over-year to $ 15.81 billion. Over the past year, the stock has lost 72.1% to close the last trading session at $ 8.82.
GPS ‘POWR Ratings reflect its poor prospects. The company has an overall D rating, which translates to a Sell in our proprietary rating system.
It has an F grade for Growth and Sentiment and a D for Stability. It is ranked #64 out of 68 stocks in the Fashion & Luxury industry. Click here to see the other ratings of GPS for Value, Momentum, and Quality.
KR shares were unchanged in premarket trading Wednesday. Year-to-date, KR has gained 7.84%, versus a -20.79% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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