Benzinga Weekly Preview: Several Large Retailers Set To Report

Next week will be a busy week for markets with several large retailers set to report and many important economic reports set to be released.

Investors will have a close eye on the Federal Reserve, as the central bank is set to release the minutes from its last policy meeting, something investors will be scouring for any clues about the bank’s plans for an interest rate hike. Meanwhile, markets will be waiting to see how the improving economic climate impacts sales for retailers across a host of sectors.

Key Earnings Reports

Next week investors will be waiting for several key earnings reports including Hewlett-Packard HPQ, Home Depot HD, Target TGT and Lowe’s Companies LOW.

Hewlett-Packard

Hewlett-Packard is expected to report third quarter EPS of $0.88 on revenue of $26.98 billion, compared to last year’s EPS of $0.86 on revenue of $27.23 billion.

Bank of America Merrill Lynch issued a a Buy rating with a $39.00 price objective on July 10, following an investor meeting with the company’s head of Investor Relations, who assured that the company’s restructuring is on track.

“HP remains on track with its updated restructuring plan (~1/2 way in 5-year process), with headcount reduction of 45K-50K by early F2015 (vs. 34K earlier) and annual gross savings of $4-4.5bn by F2016 (additional $1bn), with HP reinvesting partly in R&D/opex. We believe ~50% of the incremental restructuring is in Services, which is crucial to achieve F2014 Services op. margin of 3.5-4.5% and long-term target of 7-9% (vs. 2.5% last Q), and key to the HP turnaround. Commitment to 50% FCF return via buybacks (1st priority) and dividend is key, and we model FCF of $7.0/$8.9bn in F2014/15. We believe small, niche M&A is likely.”

Credit Suisse gave Hewlett-Packard a Neutral rating with a $35.00 target price on August 11, noting that the company will likely continue to face headwinds through the rest of the year.

“We forecast F3Q14 (July quarter) revenues of $27.2bn (-0.2% y/y, -0.5% q/q) and EPS of $0.90 vs. consensus of $27.0bn/$0.88. We believe that fundamental headwinds remain across business segments and are likely to persist through 2014. Despite increasing the total workforce reduction last quarter, HP still has more work to do on its go-to-market strategy and we remain unconvinced that revenue growth can overcome L-T structural issues. We maintain our Neutral and $35 TP.”

S&P Capital IQ gave Hewlett-Packard Co a Strong Buy rating with a $44.00 price target on August 9, predicting that the company will stabilize over the course of the next year.

“Our Strong Buy recommendation reflects our view that fundamentals are stabilizing and valuation remains attractive.We believe that HPQ is seeing stabilization within its PC and printing markets, with a slow burn the most likely scenario, but will give HPQ ample time to execute on initiatives related to mobility, enterprise and software areas. Despite a still sluggish IT spending landscape, we expect improvement exiting calendar year 2014.We positively view free cash flow generation/balance sheet improvement and see further multiple expansion as HPQ executes on its turnaround strategy. We see new growth initiatives related to the cloud and big data.”

Home Depot

Home Depot is expected to report second quarter EPS of $1.45 on revenue of $23.61 billion, compared to last year’s EPS of $1.24 on revenue of $22.52 billion.

Bank of America Merrill Lynch gave Home Depot a Buy rating with a $96.00 price objective on August 14,, citing stronger seasonal demand.

“We believe HD and LOW should both see stronger seasonal demand in 2Q after 1Q comps were impacted by cool weather. For HD, we estimate 2Q EPS of $1.44 based on 4.0% comps. Our forecasts are in line with recent BAC card data, which shows home improvement spending increased 4.2% in 2Q vs. 2.5% in 1Q and 7.8% LY.”

Credit Suisse gave Home Depot an Outperform rating with an $87.00 price target on May 27, , noting that spending in that sector is expected grow.

“HD's management said what investors needed to hear. Despite lower than expected home turnover and still difficult credit access, management seesspending in their category picking up with deferred repair and maintenance being a big driver going forward. They also kept the buyback outlook conservative providing another source of upside. We remain buyers.”

Morgan Stanley gave Home Depot an Equal-Weigh rating with a $90.00 price target on August 11, noting that weather issues could continue to plague the company in the second quarter.

“Our Q2 comp estimate of 4.5% implies a sequential acceleration from HD's Q1 comp growth of 2.6%, which was dampened ~100 bps by weather issues that could flow through to Q2.This acceleration is reasonable given underlying multi-year trends, despite the tough 10.7% compare in 2Q13. On a three-year basis, which we believe is a more telling and consistent metric, compares are not as daunting. For the prior three quarters leading up to Q1, 3-year comp trends were just shy of 17%. Q1 dropped to 13% as a result of weather and timing issues but we think the underlying environment for HD is the same. We anticipate three year comps to return to the 17% level for Q2, which would imply at least a 4% comp. We believe an improvement in HD's seasonal businesses and outdoor categories should provide support to our 4.5% estimate as the weather dramatically improved from the early Spring. This is also consistent with the leading indicator shown above.”

S&P Capital IQ gave Home Depot a Hold rating with an $82.00 price target on August 9, saying that the recovery in the US housing market may take longer than anticipated.

“We think the shares are reasonably valued, recently trading at about 18.0X our FY 15 EPS estimate, a premium to the S&P 500 and towards the upper part of its historical averages. We expect the housing market to continue to recover gradually over the coming year and believe HD will reap rewards from an accelerated focus on customer service. Favorable demographic trends, such as the aging of houses and low interest rates, should help support home remodeling efforts over the long term. Still, although we view HD's balance sheet and free cash flow generation as strong, we are concerned that a recovery to normal conditions in housing will take longer than widely anticipated.”

Target

Target is expected to report second quarter EPS of $0.81 on revenue of $17.39 billion, compared to last year’s EPS of $0.97 on revenue of $17.12 billion.

Bank of America Merrill Lynch gave Target an Underperform rating with a $50.00 price objective on August 5, noting that the company is struggling with consumers who are spending more conservatively.

“TGT’s F2Q results have been challenged by margin pressures from a promotional environment and a “cautious consumer” in U.S. stores, softer sales and price investments to clear excess inventory in TGT’s CA segment, $111MM in data breach expenses, and losses related to early debt retirement and land impairment. We see risks of further estimate cuts given: (1) we believe core comps and traffic trends remain under pressure with transactions likely still tracking down; (2) TGT’s likely difficulty in sustaining gains in selling price per unit in a more promotional environment; (3) TGT’s likely reduced ability to support comps with a re-acceleration back to the rapid RedCard penetration seen before the data breach; and (4) potential for gross margin pressures to continue in 2H.”

Credit Suisse gave Target a Neutral rating with a $55.00 target price on August 6, noting that the company will face some challenges in the near-term, including a change in management.

“Yesterday's announcement lowering 2Q EPS guidance points to the near-term difficulties TGT is facing as it awaits new CEO Brian Cornell's accession and strategic decision-making. TGT preannounced flat comps in the US and EBITDA margin pressure, suggesting that the intense cadence of promotions, including continued $50-100 gift card offers on iPad purchases, has only managed to sustain volumes. We continue to remain cautious as the challenge from the top-line perspective is likely to come next year, when TGT begins to lap these aggressive promotions.”

Morgan Stanley gave Target an Under-Weight rating with a $58.00 price target on August 11, noting that there are several uncertainties in the coming quarter.

“We anticipate a few key issues for the quarter: 1) Will new CEO Brian Cornell reduce the outlook for the U.S business? We view this is as not likely as Mr. Cornell may need time to assess the situation; 2) What impact will investments in omni-channel and Canadian operations have on the remainder of the year?;and 3) What will management do with existing 2014 guidance, which was not addressed in the pre-release.”

S&P Capital IQ gave Target a Buy rating with a $62.00 price target on August 9, noting that the company will be able to manage its recent data breach without a huge sales setback.

“We think the impact of a recent data breach will be manageable, although we expect a modest related sales slowdown to persist into early FY 15. While results at new Canadian stores have been disappointing, we think diminishing Canadian losses in FY 15, turning to profits thereafter, will drive above-average EPS growth versus peers over the next several years. We also think a more substantial economic recovery in the U.S. in 2014 could drive improved sales results.”

Lowe’s Companies

Lowe’s Companies is expected to report second quarter EPS of $1.03 on revenue of $16.56 billion, compared to last year’s EPS of $0.88 on revenue of $15.71 billion.

Bank of America Merrill Lynch gave Lowe’s a Buy rating with a $59.00 price objective on May 21, noting that demand likely improved in the second quarter.

“While comps were softer than expected due to weather woes, we believe like HD, LOW will benefit from seasonal and weather-related repair demand as the weather improves. Management noted that in regions less impacted by weather, such as the South and the West, comps were in the MSD while comps in the Northeast were down about -5%. May is off to a good start with comps running about MSD, driven by both ticket and traffic. Management believes LOW will be able to recover lost sales and that 2Q will likely be the highest comping quarter, even with a tough compare of 9.6% last year. We reiterate our Buy rating as we believe the company will continue to benefit from a multi-year renovation and remodeling cycle, as well as shift in spending towards big-ticket. We are also encouraged by the continued recovery of Pro, which performed 3x stronger than company avg. The relaunch of lowesforpros.com will continue to help increase penetration with the Pro customer.”

Credit Suisse gave Lowe’s an Outperform rating with a $55.00 price target on May 27, noting that the company will likely follow suit with Home Depot.

“While the comp was a little lower than HD's, management read from the same script, also keeping the buyback outlook lower than they should end up. We expect similar stock upside to Lowe's as we do Home Depot.”

Morgan Stanley gave Lowe’s an Equal-Weight rating with a $50.00 price target on August 11, noting that the second quarter is likely to bring in the company’s highest revenue this year.

“LOW's Q1 monthly comps were choppier than HD (2.5% February, 0.8% March, 1.9% April) as LOW is more levered to the outdoor categories - the 0.9% comp in Q1 was impacted 150 basis points due to harsh weather. On its 5/21 Q1 conference call, LOW indicated it was running at about mid single-digit comps for May and reiterated its ability to recover lost sales from Q1. Q2 is expected to be the highest comping quarter for the year.”

S&P Capital IQ gave Lowe’s a Hold rating with a $53.00 target price on August 9, saying that the housing market may not be improving as quickly as anticipated.

“With our view of LOW's strong balance sheet and impressive free cash flow generation, we think the shares are reasonably valued relative to expected near term growth. We think housing turnover has bottomed, but we do not anticipate a strong recovery over the next 12 months, particularly in single-family homes, as bank lending standards remain tight. In addition, with home refinancings and home equity loans likely to be somewhat sparse in the near term, we expect home remodeling activity, particularly on big projects, to be rather lackluster.”

Economic Releases

Central banks will be in focus next week with both the Federal Reserve and the Bank of England set to release their policy meeting minutes. Also notable will be talks from Fed Chair Janet Yellen and European Central Bank President Mario Draghi which investors will be watching for any indication about the banks’ future plans.

Daily Schedule

Monday

Earnings Releases Expected: Urban Outfitters URBN, China Mobile Games & Entertainment CMGE
Economic Releases Expected: Hong Kong unemployment rate, New Zealand’s PPI

Tuesday

Earnings Expected: Home Depot, Elizabeth Arden RDEN, La-Z-Boy LZB
Economic Releases Expected: Japanese trade balance, U.S. redbook, U.S. housing starts, US CPI, British CPI, British PPI, eurozone current account

Wednesday

Earnings Expected: Staples SPLS, Lowe’s Companies, Target, PetSmart PETM, Hewlett-Packard
Economic Releases Expected: Japanese manufacturing PMI, U.S. oil inventory data, German PPI

Thursday

Earnings Expected From: Salesforce.com CRM, Intuit INTU, Gap GPS, Dollar Tree DLTR, Hormel Foods HRL, Gamestop GME
Economic Releases Expected: U.S. existing home sales, eurozone consumer confidence, U.S. manufacturing PMI, British retail sales, eurozone manufacturing PMI, eurozone services PMI, German manufacturing PMI, German services PMI, French manufacturing PMI, French services PMI

Friday

Earnings Expected From: Foot Locker FL, ANN ANN
Economic Releases Expected: Canadian CPI, Canadian retail sales

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