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Retail Earnings in Focus This Week; Target Slashes Prices

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The first-quarter earnings season is winding down. We’ve received results from more than 90% of S&P 500 companies, with year-over-year earnings growth representing the best pace we’ve seen in nearly two years. This week, we still have hundreds of companies reporting results including 15 S&P 500 members.

A host of retailers are set to report in the coming days. Last week’s beat-and-raise report from Walmart (which saw earnings and revenues climb 22% and 6% from the year-ago period, respectively) represented the second straight quarter of accelerating growth for the retail giant, and the best gain in three years. Walmart stock (WMT - Free Report) , currently a Zacks Rank #3 (Hold), hit an all-time high on the news.

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Eyes now turn to competitor Target (TGT - Free Report) . The big-box retailer is due to report Q1 results on Wednesday before the opening bell. Just yesterday, Target announced that it will lower prices on roughly 5,000 products ranging from groceries like meat and bread to staples such as paper towels and diapers. Many price reductions have already occurred, with thousands more coming in the next few months.

Target appears to be taking a shot at Walmart in an effort to boost both its grocery and merchandise business as competition heats up. Groceries account for approximately 60% of Walmart’s annual domestic sales.

Target Earnings Hit a Roadblock

Target is expected to post flat earnings of $2.05/share. Over the past month, analysts have bumped up their Q1 estimate by 1.49%:

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Revenues are projected to decline 3.2% from the year-ago period to $24.5 billion. Target, also a Zacks Rank #3 (Hold), has exceeded the earnings mark in each of the past four quarters, delivering an average surprise of 27.1% over that timeframe.

There have been signs of a potential slowdown in consumer spending, which could possibly weigh on Target’s first-quarter performance. Consumers have been exhibiting increased caution in this high interest-rate environment, forcing individuals and families to prioritize essential purchases.

Walmart CFO John Rainey seemed to echo this sentiment despite the company’s stellar quarterly results last week, noting that shoppers’ “wallets are still stretched,” driving them to spend in areas such as groceries rather than general merchandise.

Still, Target has been proactive in adapting its business operations to remain competitive. The company’s strategic initiatives, store investments, and partnerships with popular brands are anticipated to have contributed to its overall performance during the quarter. In addition, Target is likely to have registered margin expansion thanks to clean inventory and lower supply chain and freight costs.

What the Zacks Model Reveals

The Zacks Earnings ESP (Expected Surprise Prediction) seeks to find companies that have recently witnessed positive earnings estimate revision activity. This more recent information can be a better predictor for future earnings and can give investors a leg up during earnings season.

The technique has proven to be quite useful for finding positive earnings surprises. In fact, when combining a Zacks Rank #3 or better with a positive Earnings ESP, stocks produced a positive surprise 70% of the time according to our 10-year back test.

Target is a Zacks Rank #3 (Hold) and boasts a +6.39% Earnings ESP. Another beat may be in the cards when the company reports results on Wednesday morning.

Other related companies set to report this week include membership warehouse club BJ’s (BJ - Free Report) , department store chain Macy’s (M - Free Report) , and off-price retailers TJX Companies (TJX - Free Report) and Ross Stores (ROST - Free Report) . Be sure to keep an eye on results as investors remain eager to examine the evolving consumer picture.

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