Goldman Consumer Trader Declares Walmart "Winner" As 'Trade-Down Phenomenon' Crushes Target & Dollar General

At a time when US consumers are buckling under the weight of record credit card debt and personal savings have plunged to all-time lows, the trade-down phenomenon has erupted, driving both wealthy and low-income households on a hunt for the best deals across big-box retailers. 

In July, Goldman analysts led by Leah Jordan pointed out that Walmart had the best grocery deals if that was compared with Sprouts Farmers Market, Whole Foods, and Dollar General. The analyst reconfirmed last month that Walmart continued to lead retailers in offering consumers the most competitive grocery prices. 

Then on Tuesday, Walmart reported reported earnings that beat across the board for the third quarter, but also raised its guidance for the third time in a row. There was also signs that wealthier customers traded down to the big box retailer, driving ticket sizes higher. That growth was driven by upper-income households making $100,000 a year or more. 

Goldman's consumer specialist Scott Feiler penned a note on Wednesday morning following Target's dismal earnings report, which showed it was no match against Walmart. The woke retailer continued to hemorrhage market share. 

Feiler noted the challenging consumer environment, one in which there will only be one winner: Walmart—that's because it offers the best deals. 

"However, we are not in a Consumer environment that is good enough that it is a rising tide lifts all boats. There will be winners (WMT) and there will be share donors (see TGT this morning)," the analyst said. 

Here are Feiler's top six takeaways about the consumer environment following the TGT ER earlier today:

• Takeaway # 1: We are in a Consumer environment that is steady enough that winners can continue to outperform (see WMT yesterday with +5.3% Walmart US comp sales and stock was +3% to new all-time highs, despite the elevated multiple to history).

• Takeaway #2:  However, we are not in a Consumer environment that is good enough that it is a rising tide lifts all boats. There will be winners (WMT) and there will be share donors (see TGT this morning).

• Takeaway #3: Dispersion is the name of the game and the current consumer environment supports a winners/losers environment.  I would expect that to continue into the rest of EPS season and 1H25.  We are seeing it in COST/WMT vs TGT. We are likely to see it in grocers and big box discounters vs dollar stores. We have seen it in footwear with ONON/DECK vs NKE, in MCD vs peers and in many other end markets as well.

• What Happened This Morning?: TGT is down 20% in the premarket. Expectations were muted, which is why short interest was near 4 year highs. However, the low bar was on the comp sales line, which was not much worse vs expectations (+0.3% vs Consensus +1.5% and the bogey for +0.5%). The bar was not for a big EPS issue, which ended up being the big surprise here($1.85 vs Consensus $2.30). Gross margins are 100 bps light for 3Q and 4Q margins are also implied to be well below.

• What to Do Here? The stock is down 20% in the premarket on an 8% FY EPS cut, so we are seeing some further multiple compression, despite 4-year high short interest. Having said that, almost nobody I spoke to had this big of an earnings miss/cut as their base expectation.  I would expect to see some short covers, but do not think long buyers will be quick to step in and take a more constructive view.

• Peer read? TGT did have +2.4% traffic growth vs +3% last quarter, so traffic is ok. As a result, I do not think all of Retail needs to get aggressively sold. However, when a name like TGT is down 20% and has 60% discretionary exposure, the natural reaction will be for other discretionary general merchandise names to see some underperformance. Would expect an elevated focus on DLTR, DG, FIVE, TJX (reports this morning also), ROST, BURL, etc.

There can only be one winner. 

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