Damo maintains the “gain” rating of the top four US retail stocks: this quarter's earnings report will be difficult to change the long and short debate, “lackluster” or provide a good layout opportunity

The Zhitong Finance App learned that on November 9, Morgan Stanley released third-quarter earnings forecasts for major US retail stocks, maintaining the “overholding” ratings of Walmart (WMT.US), Home Depot (HD.US), Lowe's (LOW.US), and Target (TGT.US). The target prices are $125, $400, $258, and $170, respectively. According to Damo's judgment, this quarter's earnings report will probably not substantially change the investment logic of each company — Walmart's performance is on the same level as expected, Home Depot and Lowe's are still stuck in the absence of demand recovery, and Target is the only company likely to hand over “surprise” results. However, the report suggests that when all of the market's attention is focused on AI and smart e-commerce, the “lack of excitement” of retail stocks itself may be the starting point of the reverse layout.

Why is “lackluster” a reason to be bullish

Damo pointed out that investors' attention is firmly focused on AI, smart e-commerce, and the next big growth story, and the upcoming big retail stock earnings season looks quite “old school.” The resulting judgment is that this quarter will not bring enough incremental information to reshape the investment debate. Walmart's execution level is still excellent, but efforts are being made to rebuild the “growth and profit margin rise” narrative; Target is expected to hand over an encouraging same-store data, but it is difficult to answer questions about profit transmission and the 2027 outlook; and the home building materials sector is still waiting for a recovery in demand that arrives later than everyone expected.

The focus of the report is not “who has the best earnings this quarter”, but “where the market may be underestimating the next changes” — in the home building materials sector, where profits are low in the cycle, catalysts are scarce, and expectations have been greatly depressed, reverse opportunities are being created, although the growing performance gap between Home Depot and Lowe's complicates this deal.

Walmart: Performance is in line with expectations, and the valuation has basically met the target price

Damo expects Walmart's results for the third quarter of fiscal year 2027 to be basically in line with market expectations. The fourth quarter guidance also continues the current outlook, pointing to a new acceleration in the adjusted operating profit growth rate. The company will release its earnings report before the market on November 19.

Specifically, the company's US same-store sales are expected to increase by 2.9% (in line with consensus), up from 2.6% in the second quarter; e-commerce continues to grow by more than 20%, and Walmart Connect advertising revenue maintains a high growth rate of more than 30%. In terms of profit rhythm, the adjusted operating profit growth rate bottomed out in the third quarter (fixed exchange rate of about 3%) and accelerated again in the fourth quarter — reduced investment of about 600 million US dollars in the third quarter (corresponding to tariff refunds not introduced in the second quarter) dragged down about 9 percentage points, and the growth rate after exclusion was about 12%. On the cost side, the diesel price discount represents a headwind of about 2.5 billion US dollars, but Damo believes that the company can hedge with its own fleet and shipping capacity, and maintain the price advantage while adjusting prices.

In terms of valuation, Walmart's current stock price is equivalent to 40 times the earnings per share for the next 12 months, which is higher than the average for the past ten years. Damo believes this premium is reasonable because Walmart's e-commerce business (including online retail, Walmart Connect advertising and membership), supply chain capabilities, retail AI first-mover advantage, and defensive attributes all support the valuation. However, the target price of $125 is basically the same as the current price, which means that a “good company” is not equal to a “good return” — there is almost no room for further growth in this stock.

Home Depot and Lowe's: Demand stabilizes at a low level, but can't wait for a recovery

At the industry level, retail sales of home building materials in the US increased by about 5% year on year from August to September, but Damo pointed out that part of this was due to the base effect; as mortgage interest rates rose, existing home sales turned negative year on year, and large optional renovation projects continued to be under pressure. Its contractor research also gave a similar signal: activities, mainly maintenance and minor works, have improved slightly, but transaction conversion is still difficult, and the order backlog will basically have to wait until 2027 to improve.

Home Depot's same store is expected to grow by 1.5% to 2% in the third quarter, slightly lower than the 1.7% market; third-party credit card data points to a 3.4% increase in revenue. Management said that the beginning of the third quarter was in line with demand in the second quarter. The Damo survey also confirmed an increase in the share of professional customers, but cautioned that it is not appropriate to infer the acceleration of recovery based on this — growth in the second quarter was still driven by customer unit prices, and transaction volume was declining. On the profit side, earnings per share are expected to be around $3.82, in line with the market, but gross margin is under pressure: a tariff refund of US$685 million has been confirmed in the second quarter, which is equivalent to early payment of earnings. The third quarter must simultaneously absorb rising fuel and energy costs and diluted acquisitions. The same store's growth rate is below its historical operating leverage threshold of about 3%, which can only translate into an increase in earnings per share of about 2%. Home Depot will release pre-market earnings on November 17.

Expectations for Lowe's and Damo are slightly optimistic: same-store sales are expected to grow by about 0.5% in the third quarter, higher than the market's 0.1% forecast and the company's “roughly the same” guideline; credit card data points to an 8.5% increase in revenue, higher than the consensus 7.7%; earnings per share are about 2.95 US dollars, slightly higher than the market and the company's implied about 2.85 US dollars, but the year-on-year decline is still about 4%. The real question is next year: Will Lowe's 2027 initial guidance and update the three-year financial framework along with the three-quarter report. Damo believes that this initial guidance may fall short of market consensus. In particular, the profit margin before interest and tax may decline; however, investors had anticipated that the 2027 forecast would have room to be revised, so the actual impact may be less than the numerical surface. In contrast, the clarity of the long-term framework may be more important than short-term revisions, and Investor Day on December 9 is expected to provide a more clear answer to this.

Target: the only company likely to hand over “surprise” results

Among the four companies, Target is the only one labeled by Damo as “same-store sales may exceed expectations.” Damo expects its same store and earnings per share for the third quarter to be higher than the consensus: the market assumes a 3.3% increase, and Damo thinks it is conservative — considering the market's expectations for a 5% to 6% same-store growth rate, it is not difficult for the earnings per share to fall at 2.15 to 2.20 US dollars (consensus $2.06), supporting the operating leverage from improving full-price sales and advertising revenue (up about 40% in the first half of the year) due to category resets. What is more worth watching is the implicit revision of the full-year guidance: Damo expects the company to set the annual sales growth rate at 6%, raise the adjusted earnings per share guideline to 8.50 to 9.50 US dollars (previously 8.25 to 9.25 US dollars), and expand the profit margin before interest and tax by about 60 basis points to 5.2%. In terms of valuation, Target has re-estimated the price-earnings ratio of about 16 times the 2027 forecast during the year (12 times at the beginning of the year), which is still significantly below the sector average level of about 40 times — Damo's explanation is that the transformation is still early, and the sustainability of the same store and operating leverage in 2027 is questionable. Target will release its earnings report in advance of the market on November 18.