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Some Bargains Still Reign Supreme
Earnings have been something of a mixed bag for the higher-end retailer, as of late. Most managed to meet or beat estimates, while (not surprisingly) falling short of last year's comparable figures. Value-oriented retailers, on the other hand, mostly aced the first part of the year.
IN PICTURES: Eight Ways To Survive A Market Downturn
They're not All the Same
Perhaps there's a lot to be said for not being Wal-Mart Stores (NYSE:WMT) or Target Corp. (NYSE:TGT).
Target's Q1 earnings came in 13% lower than last year's number, while same-store sales shrank 3.7%. Like Target, Wal-Mart's first quarter met expectations, with a modest 1% increase in earnings, despite a 1% dip in revenue. The really odd part? Wal-Mart's same-store sales were actually up 3.7%, and the company still didn't improve the bottom line.
You'd think, if Target and Wal-Mart couldn't do well in this environment, nobody could. Think again.
Big Lots Inc. (NYSE:BIG) pushed its net income up by 5% during its fiscal Q1, earning 44 cents per share this time around rather than the previous 42 cents. That beat the market's expected number by four cents. Sales were off by about 1%.
Like Big Lots, Fred's Inc. (Nasdaq:FRED) also managed to improve the bottom line by shrinking the expense lines. The company raked in per-share earnings of 21 cents during the three-month period ending on May 2. That was three cents better than results from Q1 a year ago, and in line with analyst's expectations. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)
Dollar Tree Inc. (Nasdaq:DLTR) stole the first quarter show though, improving the company's bottom line by 39%. This year, the company took home quarterly earnings of 66 cents versus only 48 cents for the same quarter a year ago. The market was anticipating only 60 cents. Same-store sales were higher by 9.2%.
Fair Comparison
While the numbers above paint a less-than-impressive picture of Wal-Mart and Target (and a fairly rosy one for our other three retailers), let's be careful not to jump to conclusions. Perhaps the bar was set too high for the nation's biggest and second-biggest discounters. Or, perhaps the bar was too low for the second-tier names.
Though Fred's looked a little troubled in comparison, Wal-Mart and Target have plenty of rivalry from Big Lots and Dollar Tree (just to name a couple) in the two biggest categories investors care about - margins and valuation. Check out the historical and forward-looking price-to-earnings ratios along with recent net profit margins.
What to Do
Though it's not wise to diminish Wal-Mart's incredible growth story or to take anything away from Target, which has done a great job of keeping Wal-Mart on its toes. Still, the question stands, "Have Wal-Mart and Target peaked from an investor's point of view?"
Think about it. Fifteen years ago, the sheer size, pricing power and merchandise selection of an average Wal-Mart was the attraction. Now, Wal-Mart has strong competition at least on the latter two of those fronts.
Every item for sale in a Dollar Tree store is allegedly priced at $1 or less. Big Lots can (depending on the particular store) offer just as much selection when it comes to home and garden and home furnishings. Many Kroger's (KR) are now "multi-department" stores, finally striking back against Wal-Mart's entry into the grocery biz.
In other words, there's no particular competitive advantage used by Wal-Mart to dominate all respective markets anymore.
Instead, (and as the numbers indicate) life isn't so easy for the world's biggest retailer now that the playing field is being leveled. The deep discounters and specialty stores - and even grocery stores – can now compete very well with Wal-Mart at least in one aspect. That aspect is usually price, though convenience is a close second (massive square footage is annoying when you just need to grab some milk in a hurry).
The Bottom Line
Perhaps the inconvenience to customers and inherent lack of customer focus that comes with sheer size has become the gaping chink in Wal-Mart's armor, clearing a path for the likes of Dollar Tree or Big Lots. It's interesting how last quarter's earnings growth, or lack thereof, were unique to the industry's mega-names, while the smaller frye managed to make things better - just something for investors to think about, considering that excessive size is one problem Wal-Mart will never be able to solve gracefully. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks.)
IN PICTURES: Eight Ways To Survive A Market Downturn
They're not All the Same
Perhaps there's a lot to be said for not being Wal-Mart Stores (NYSE:WMT) or Target Corp. (NYSE:TGT).
Target's Q1 earnings came in 13% lower than last year's number, while same-store sales shrank 3.7%. Like Target, Wal-Mart's first quarter met expectations, with a modest 1% increase in earnings, despite a 1% dip in revenue. The really odd part? Wal-Mart's same-store sales were actually up 3.7%, and the company still didn't improve the bottom line.
You'd think, if Target and Wal-Mart couldn't do well in this environment, nobody could. Think again.
Big Lots Inc. (NYSE:BIG) pushed its net income up by 5% during its fiscal Q1, earning 44 cents per share this time around rather than the previous 42 cents. That beat the market's expected number by four cents. Sales were off by about 1%.
Like Big Lots, Fred's Inc. (Nasdaq:FRED) also managed to improve the bottom line by shrinking the expense lines. The company raked in per-share earnings of 21 cents during the three-month period ending on May 2. That was three cents better than results from Q1 a year ago, and in line with analyst's expectations. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)
Dollar Tree Inc. (Nasdaq:DLTR) stole the first quarter show though, improving the company's bottom line by 39%. This year, the company took home quarterly earnings of 66 cents versus only 48 cents for the same quarter a year ago. The market was anticipating only 60 cents. Same-store sales were higher by 9.2%.
While the numbers above paint a less-than-impressive picture of Wal-Mart and Target (and a fairly rosy one for our other three retailers), let's be careful not to jump to conclusions. Perhaps the bar was set too high for the nation's biggest and second-biggest discounters. Or, perhaps the bar was too low for the second-tier names.
Though Fred's looked a little troubled in comparison, Wal-Mart and Target have plenty of rivalry from Big Lots and Dollar Tree (just to name a couple) in the two biggest categories investors care about - margins and valuation. Check out the historical and forward-looking price-to-earnings ratios along with recent net profit margins.
|
Retailer |
Prior 12 Months Price/Earnings |
Forward-Looking Price/Earnings |
Prior 12 Months Net Margin % |
|
Wal-Mart(NYSE:WMT) |
14.9 |
13.0 |
3.3% |
|
Target (NYSE:TGT) |
14.7 |
13.1 |
3.28% |
|
Big Lots (NYSE:BIG) |
12.8 |
11.5 |
3.31% |
|
Fred\'s (NASDAQ:FRED) |
31.6 |
16.5 |
1.0% |
|
Dollar Tree (NASDAQ:DLTR) |
16.8 |
13.9 |
5.1% |
|
Valuations as of June 2, 2009 |
|||
Though it's not wise to diminish Wal-Mart's incredible growth story or to take anything away from Target, which has done a great job of keeping Wal-Mart on its toes. Still, the question stands, "Have Wal-Mart and Target peaked from an investor's point of view?"
Think about it. Fifteen years ago, the sheer size, pricing power and merchandise selection of an average Wal-Mart was the attraction. Now, Wal-Mart has strong competition at least on the latter two of those fronts.
Every item for sale in a Dollar Tree store is allegedly priced at $1 or less. Big Lots can (depending on the particular store) offer just as much selection when it comes to home and garden and home furnishings. Many Kroger's (KR) are now "multi-department" stores, finally striking back against Wal-Mart's entry into the grocery biz.
In other words, there's no particular competitive advantage used by Wal-Mart to dominate all respective markets anymore.
Instead, (and as the numbers indicate) life isn't so easy for the world's biggest retailer now that the playing field is being leveled. The deep discounters and specialty stores - and even grocery stores – can now compete very well with Wal-Mart at least in one aspect. That aspect is usually price, though convenience is a close second (massive square footage is annoying when you just need to grab some milk in a hurry).
The Bottom Line
Perhaps the inconvenience to customers and inherent lack of customer focus that comes with sheer size has become the gaping chink in Wal-Mart's armor, clearing a path for the likes of Dollar Tree or Big Lots. It's interesting how last quarter's earnings growth, or lack thereof, were unique to the industry's mega-names, while the smaller frye managed to make things better - just something for investors to think about, considering that excessive size is one problem Wal-Mart will never be able to solve gracefully. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks.)
by
James Brumley
James Brumley is a freelance writer and registered investment advisor. He began his career as a broker with a major Wall Street firm, where fundamentals and long-term holding periods were core strategies. After that, he switched gears completely, becoming an analyst at a short-term trading newsletter that focused on technical analysis. He now manages client money using the best of both philosophies. His company, Bluegrass Portfolio Management, offers investors an opportunity to reap superior returns with minimized risk.
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