John Buckingham is a value-oriented portfolio manager and the editor of The Prudent Speculator, a top-performing financial newsletter that has been published for 44 years. Here, he looks at 3 plays on big box discount retailing stocks.

Discount supermarket and superstore chain Walmart (WMT) reported an impressive fiscal Q1 2022 Tuesday that included adjusted EPS of $1.69, more than 38% better than the consensus analyst estimate of $1.22. Revenue came in at $138.3 billion, outpacing an expected $132 billion.

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Walmart U.S. comparative sales were stronger than expected, up 6% in the quarter and up 16% on a two-year stack. Sam’s Club grew comp sales nearly 11%, excluding fuel and tobacco, and International sales growth was strong, increasing more than 5% in constant currency with strength in India, Canada and China. Globally, ecommerce sales growth remains robust at more than 40%.

There is no doubt that competition is fierce within retail, but we continue to be impressed by Walmart’s transformation and execution to build a customer-centric seamless omni-channel ecosystem. This includes integration of its ecommerce, grocery and general merchandising businesses, as well as the continued rollout of various ways for guests to shop.

WMT continues its brisk-paced expansion of same-day delivery locations and has launched Walmart+ to compete with Amazon Prime.

Despite additional costs required to adapt to COVID-19, we note that the company has increased its dividend for the 48th consecutive year (yield is 1.6%) and approved a new $20 billion share repurchase program (the company bought back $2.8 billion worth of stock in Q1…greater than the total amount spent last year on buybacks).

We continue to think investments in Flipkart and (JD), along with its foray into service sectors like Health Care, FinTech and others, lengthen the retailer’s runway for growth and diversify revenue. We also like that WMT continues to generate strong free cash flow. With the continued operational momentum, we have boosted our Target Price for WMT to $172.

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General merchandise discount store chain Target (TGT) announced that it earned $3.69 per share in Q1, blowing away the $2.24 estimate, as sales grew 23% to $23.9 billion. Same-day services (Order Pickup, Drive Up and Shipt) grew more than 90%, led by growth in Drive Up of 123%.

Unlike with some other retailers, investors greeted the stellar report with a flurry of buy orders, sending TGT shares up nearly 14% for the full week.

We appreciate how Target’s investment in recent years allows the company to use its proximity (more than 1,900 stores within 10 miles of the vast majority of U.S. consumers) to elevate the convenience it is able to offer.

While we are mindful that the current growth rates (a product of fiscal stimulus and exuberance around the economy reopening) will likely begin to fade, we think Target remains poised to benefit from discretionary purchases as GDP forecasts heat up for 2021.

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Management repurchased 6.1 million shares in the quarter for $1.2 billion at an average price of $190.77 and has said that it will be recommending a robust increase in the quarterly dividend to the board later this year. For now, the yield is 1.2% and our Target Price has been hiked to $243.

Department store chain Kohl’s (KSS) announced last week that it earned $1.05 in fiscal Q1 2022 on $3.66 billion of sales. The bottom-line result was vastly better than the $0.02 loss analysts had expected, while sales were ahead of the $3.50 billion estimate.

Shares plunged 10% despite the Q1 beat due to cautious comments from CFO Jill Timm on supply chain and inflation pressures. Still, management significantly hiked its guidance with Kohl’s now expecting fiscal 2022 earnings per share between $3.80 and $4.20 on revenue growth in the “mid-to-high teens” compared to 2020.

We don’t think inflation at the projected levels should cause much consternation. However the bigger impact to Kohl’s could be related to supply chain headwinds, especially if they stiffen more than the management team is able to offset.

While it may disappoint short-term investors, we think Ms. Gass and Co. are appropriately focused on 2023 and beyond, having done an exceptional job weathering the pandemic.

We believe the government’s stimulus efforts helped KSS later in the recovery process, but the company’s strong balance sheet carried it through the early days where many other retailers were forced into significant hardship or bankruptcy.

We continue to like that still KSS boasts one of the strongest balance sheets of its peer group, even if the debt level rose last year, and we are pleased to again collect a dividend ($0.25 per share per quarter; a 1.9% yield). Our Target Price for KSS has been lifted to $72.

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