By coinnews 
00:00 Speaker A
All right. Big box stores, meanwhile, are reporting quarterly earnings this week, and while it’s been a mixed bag for retailers, some names are rising above the competition in the tariff landscape. We’re now figuring out how to play the retail sector with the Yahoo Finance playbook, and joining us now is Brian Mulberry, client portfolio manager at Zacks Investment Management. Brian, it is always great to see you. So let’s, let’s compare and contrast some of the big names in this space, Brian. Get your take on how you kind of see them. One of the first ones would be the obvious one, Walmart and Target. Now, you might throw up those stock charts, Brian, and you can see how that kind of tells the story. Uh, we did recently, this week, Brian, we had a target bull on the show, and I think his argument was more valuation. He just thought a lot of the bad news had been priced into Target. I’m curious how you see it.
01:31 Brian Mulberry
Yeah, I certainly understand the argument. I mean, Target’s down close to 40% on a year-to-date basis. There is a point where the valuation starts to become a little bit more attractive, but for us, it has to start with some type of earnings growth, and we’re just not seeing it, at least in the near term, for Target. They’re still continuing to struggle with some legacy issues from COVID, in terms of getting their inventory timing down properly. And now you throw, on top of that, the issue that they still have around 30% of their goods directly sourced from China. So they’re really struggling to get things right, to turn the corner, and look better from an earnings growth that profitability picture just isn’t clear enough for us to like the name. On the other side, you’ve got Walmart. They’ve got a little bit more diversity in their product lineup, and that’s showing in the sales growth that they have. You know, April retail sales, I think, came in as a surprise for all of us, and that just, it was positive. It was up 0.1%, but that’s $721 billion out there for grabs for these big box retailers, at this moment in time. And what we found in Walmart’s earnings is their average ticket size is going up. So foot traffic is roughly flat, maybe slightly lower, but they’re getting more wallet share from consumers. And that’s the biggest difference between the two stocks right now. You have consistent revenue growth, and consistent profit growth from Walmart, and Target is almost the other side of the coin, almost the complete opposite.
03:45 Speaker A
All right. We need a little, like, ding ding ding to talk about the second round here. Um, so let’s talk about two other retailers. So clearly you think Walmart has the advantage between Walmart and Target. What about Home Depot and Lowe’s, two other retailers we heard from this week, um, and you know, taking a different approach in a number of different areas, including on tariffs.
04:20 Brian Mulberry
Yeah, absolutely. And I mean, the news that we got from Home Depot is that here, very soon, their overall exposure to China, and the reason we keep bringing up China is it’s the worst-case scenario. The maximum level of tariffs that we know about in this point in time, coming out of China. That’s where it impacts earnings over a long period of time. Home Depot says, “Very quickly, we’re going to have less than 10% exposure.” And that adds a lot more durability to their long-term profit structure. Home Depot has also made a lot of investments linking customers to contractors, getting jobs done. And in that retail sales number from April, building materials were up 0.8%. It was one of the bigger drivers in there. And so we saw that reflected in a little bit stronger, I think, than expected numbers from Home Depot coming out of Q1, and they’re doing a really good job of managing that long-term profit structure, mitigating the cost of tariffs. And so it’s a name that we like more than Lowe’s, for similar reasons. Lowe’s has more of a DIY type of a feel. And unfortunately, the customers at this point don’t want to do it themselves. They want to be connected to that pro segment. Now, Lowe’s is growing there. It’s one of the faster-growing segments of their business, but they’re just really far behind the curve when it comes to those types of projects. And Home Depot’s really built a whole system around that pro experience for contractors and bulk orders, and also connecting them to consumers to get jobs done. So we’re just finding the integration and the money already spent on that growth is paying off for Home Depot.
06:29 Speaker A
And how would you characterize valuation, Brian? I mean, you must find it compelling here.
06:41 Brian Mulberry
Yeah, absolutely. I mean, I think there’s a really good story here. I mean, there’s a lot of people out there that are going to be anchored to their properties because they have a 2 or 2.5, 3% mortgage rate. So they’re going to continue to stay with those properties, but want to improve them over time. So given the current valuation and the long-term revenue growth, this is a very strong company that has a commitment to returning capital to shareholders, and they also want to make sure that they’re staying in line with that strong balance sheet directive that they’ve had over the last three years. It’s really paying off well for them because they have low levels of debt. Lowe’s, on the other hand, is very leveraged. They have a lot of debt on their balance sheet. And so again, just in terms of where you’re assessing risk versus reward over this period of time, Home Depot definitely seems more attractive.
07:47 Speaker A
All right. Advantage Home Depot in that round. Round three, we got TJX versus Kohl’s. You know, I don’t know if this one’s quite a fair fight, to be honest, Brian, but talk me through your thinking on these two.
08:13 Brian Mulberry
Yeah. So I mean they’re almost not even in the same ballpark. If tariffs are your main concern, and we could understand why, TJ Maxx has a variety of ways to source inventory, and sometimes they can buy directly from unsold department store inventories that have already paid tariffs, if there were any, to begin with. So they have a way of getting goods on shelves that are in demand. We all love the name brands that you can find at TJ Maxx and HomeGoods, and pay, obviously, discount prices. There is a model there where TJ Maxx has some exposure to direct manufacturers that come from the Pacific Rim regions, and China being part of that, but they have a way to mitigate that through multiple levels of sourcing. Whereas Kohl’s, again, they’re still too dependent on China directly to get products on shelves. It’s roughly 20 to 25% of anything that you find inside a Kohl’s store is going to be subject to those maximum levels of tariffs right now. Again, just putting a lot of pressure on the near-term profit structure that is also weighing down long-term growth. So it really comes down to, know what you own, know why you own it. And at this point, if you’re just paying attention to some of those finer details, higher quality balance sheets are winning the day.
10:01 Speaker A
At the same time, Brian, you look at that Kohl’s stock chart, and this stock has been shelled, Brian. I mean, how much, you obviously just don’t think all the bad news is priced in there.
10:26 Brian Mulberry
No, I think that they’re just not getting things right in terms of sourcing and controlling costs at this moment in time. Unfortunately, I think there’s more volatility to come because they just simply can’t right the ship and turn a corner to profitability. They’re having to continue to further discount goods, weighing on margins. Their average ticket sales is going down at this point in time. So they’re having to find different ways to incentivize customers. Adding too many incentives means you’re weighing on that profitability. So they can still have a certain amount of top-line sales that keeps the business running, but they’re still squeezing that overall profitability, quarter after quarter after quarter. I don’t think all the bad news is quite priced in just yet.
11:21 Speaker A
Brian, always great to see you. Appreciate your time and those picks, sir.
11:28 Brian Mulberry
Have a great weekend.
11:30 Speaker A
You too.