Key insights
- Bernstein analysts predict Target and Five Below are likely to beat Q1 earnings estimates due to catering to higher-income consumers benefiting from stimulus. However, they caution that forward guidance and margin performance will be crucial for investor reaction. The report highlights a divergence in retail performance based on consumer income levels, with discounters facing headwinds from inflation and reduced food-stamp transfers.
Investing.com -- Bernstein named two U.S. retailers it believes are most likely to beat Wall Street consensus estimates in the first quarter, in a note on Tuesday, though the bank cautioned that the outlook for the rest of the year may matter more to investors than the headline results.
Five Below and Target are the names in question.
Analyst Zhihan Ma said the quarter is shaping up as "one of bifurcating fates," with retailers catering to higher-income consumers set to benefit from stimulus momentum, while fuel pressures, general inflation and reductions in food-stamp transfers are likely to weigh on discounters serving lower-income shoppers, including Dollar General, Dollar Tree and Walmart.
Bernstein believes Five Below and Target are best positioned to beat estimates, with Costco carrying an outside chance given fuel inflation headwinds.
The bank noted, however, that those beats are already well-telegraphed by recent credit card data, and that margins will be a key swing factor.
For both Five Below and Target, Bernstein stated that investor attention will fall on how management guides for the remainder of the year, warning that executives must strike a careful balance to avoid an investor reaction that could cause them to "sell the news."
On Walmart, Bernstein continues to like the retailer given strong market share momentum and improving profitability, but noted that expectations are high at current valuations.
Ma prefers Dollar General over Dollar Tree in the discount space, describing Dollar General as a "self-help story that's less predicated on the macro environment."