Istock

Target Corp. (TGT - Get Report) offers a "more compelling" earnings outlook to its main U.S. rival Walmart (WMT - Get Report) , heading into third quarter earnings for the biggest U.S. retailers, Cowen analyst Oliver Chen said Thursday, although both groups are likely to perform well heading into the final months of the year.

Chen said Target's discounted market value, compared to its larger rival, as well as its improving digital operating model gives it an edge in terms of near-term performance heading into third quarter earnings reports over the next two weeks. Target's new curbside collection offering, a back-to-school boost and improving profit margins are also likely to support stronger Q3 earnings, Chen said, with earnings likely coming in at $1.19 per share and same store sales rising by around 4% from last year.

Target's re-launching of the Toys R Us website will also support Christmas quarter performance, Cowen noted, although the impact could be limited to a fourth quarter boost of around 20 basis points.

"We believe Target is currently better positioned from a valuation perspective as shares are trading at a significant multiple discount versus Walmart," Chen wrote. "Nevertheless, we expect shares of both companies to continue to work as respective management teams continue to successfully execute on internal initiatives and take additional physical and digital market share."

Target shares were indicated 0.7% higher at the start of trading Thursday to change hands at $111.32 each, extending the stock's staggering 67% year-to-date gain. Walmart, meanwhile, traded 0.48% higher at $120.08 per share, a move that pegs its 2019 gain at 28.5%. 

Walmart's third quarter earnings, which are scheduled for November 14, are likely to deliver EPS of $1.10 per share and comparable store growth of 3.5%, Chen said, thanks in part to a focus on core digital growth, grocery pickup offerings and renewed electronics demand. 

New leadership roles at both groups, Chen said, will have an impact on near-term performance and commentary, with Walmart CEO John Furner and Target CFO Michael Fiddelke, both of whom started their new positions earlier this month.

"Furner previously succeeded at turning around Sam's Club which in-part focused on improving the in-store experience through the use of mobile, and empowering employees with various technology enabled tools," Chen said. "We believe Mr. Furner will bring a similar mindset to Walmart U.S., and we anticipate a renewed focus on further bridging the physical and digital experiences through mobile innovation."

Target, which reports on November 20, could report a gross margin of around 29%, Chen said, and is facing "its easiest compare of the year" for group expenses, which should add a further bottom line boost. 

"For 3Q19, we are raising our EPS estimate to $1.19 from $1.15, above Street's $1.18 and above mid-point of guidance of $1.04 to $1.24," Chen said. "We are raising our comp estimate to +4.0% from +3.5%, above Street's +3.5%, and guidance of ~3.4%."