On Any Post-Earnings Dip This Week, Deutsche Bank Recommends Buying These Two Retail Stocks

Deutsche Bank reports that Costco and Dollar Tree stand out as good buying opportunities in a challenging year for retailers.

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Following disappointing forecasts from Walmart and Home Depot for 2023, both companies report earnings this week. John David Rainey, the chief financial officer at Walmart, said last week that the company is taking a cautious approach due to the fact that the consumer is still under a lot of pressure. This fiscal year, Home Depot expects flat same-store sales due to weak consumer spending and some pressure in the goods industry, resulting in flat same-store sales.

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Analyst Krisztina Katai wrote in a note on Friday that the retailer's guides are expected to be weaker going forward, indicating more volatility ahead. “Among our top picks within this group in a volatile environment - COST and DLTR - we think have top-line momentum and idiosyncratic topline and margin drivers (DLTR), and we would be looking to take advantage of any share price weakness after earnings."

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There is a good chance that Dollar Tree will provide guidance well below the consensus estimate for 2023 as a result of macroeconomic uncertainty and investments to improve the quality of the products and stores, among others.

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It is expected that the retailer will release earnings for the fourth quarter on Wednesday. The earnings per share of Deutsche Bank were lowered by 6 cents to $1.97 for the fourth quarter of 2018. As part of its cuts, it also lowered its outlook for earnings per share in 2022 and 2023 for the full year. Katai said all of the forecasts are below Wall Street's estimates for the year.

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In spite of this, her price target of $181 implies a nearly 26% gain from Friday's close.

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Deutsche Bank also lowered its earnings estimates for Costco's latest quarter by two cents, bringing the company's earnings per share to $3.27. Although this figure is below what was expected, it is still higher than what was expected for the wholesale retailer, Katai noted. As she pointed out, the firm's 2023 earnings per share estimate of $14.54 remain unchanged and are above the Street's forecast for that year.

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With food inflation at an all-time high and some markdown pressure in general merchandise, her focus for Costco is on margins in light of elevated food inflation.

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“I expect to see relatively clean inventories coming out of 2Q, which should in part eliminate the current bear thesis on the stock, as it should reduce the risk of markdowns,” Katai wrote in his report.

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Currently, her price target on Costco is $574 per share, suggesting a 17% upside from the close on Friday to the price target. A report on Costco's earnings is expected to be released on Thursday.