Retail Ratings, Price Targets: Ohmes maintained a Buy rating on Target with a $150 price target; a Buy rating on Dollar Tree with a $115 price target; and a Buy rating on Walmart with a $150 price target.
BofA's Top Picks: Target is likely to benefit from momentum in the apparel and home categories, which offer "dramatically higher" margins, Ohmes said in a Wednesday note.
Dollar Tree should be able to take advantage of a rebound at its core Dollar Tree brand, the analyst said.
Walmart should see continued strong grocery sales and profit, along with stronger higher-margin general merchandise sales compared to the first quarter, he said.
Elevated Food Sales: Food retail sales remain elevated despite many restaurants and bars reopening, Ohmes said.
The ongoing momentum makes the case for retailers to report comp upside, especially among those with fiscal quarters ending in late July or early August, the analyst said.
Lower Industry Promotions: The retail space is undergoing a trend of offering consumers fewer industry promotions.
In fact, food inflation has been accelerating since April, and this bodes well for retailers that sell groceries, especially the three top picks, Ohmes said.
Fewer Trips: Trip consolidation among consumers since the COVID-19 outbreak has applied to shopping trips, the analyst said, adding that this trend bodes well for large discount retailers and convenient omnichannel offerings.
Free Cash Flow Strength: Retailers are seeing "unusually strong" top-line trends, and this should support earnings in 2021 and beyond through share buyback programs, paying down debt and other initiatives, Ohmes said.
Target is expected to grow the cash on its balance sheet by 16% year-over-year to $2.988 billion in 2020; Dollar Tree by 151% to $1.354 billion; and Walmart by 92% to $18.126 billion, according to BofA's expectations.
Photo courtesy of Walmart.
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