Big box retailers have showcased some resilience during the third quarter, with Home Depot (HD), Lowe’s (LOW) and Dick’s Sporting Goods (DKS) posting relatively strong results. Walmart (WMT) and Target (TGT) also followed through with respectable quarters, and we think this bodes well for most of the group heading into the holiday season.
Walmart’s third-quarter results, released November 13, showed consolidated net sales advancing 2.8% with US comparable store sales increasing 0.5% for the 13-week period ended October 31, 2014. Walmart has been under competitive attack from a variety of fronts. Not only is Target its key rival, but dollar stores such as Family Dollar (FDO), Dollar General (DG) and Dollar Tree (DLTR) have been nipping at its heels through most of the past half-decade, if not longer. Amazon (AMZN) and eBay (EBAY) will continue to pressure the big box retailing giant, but for the most part, we’re pleased with any level of top-line expansion at Walmart.
The Bentonville, Arkasas-based behemoth said third-quarter earnings per share came in at $1.15, hitting the midpoint of the previously-issued guidance range of $1.10-$1.20. Management also updated its full year earnings per share guidance to the range of $4.92-$5.02 (was $4.90-$5.15 per share), up from last year’s mark of $4.85 per share. In a year that witnessed a considerable amount of bad press regarding minimum wage coupled with staged sit-ins by employees, it’s saying something for Walmart to expect any earnings growth at all. Walmart International grew net sales 2.9% on a constant-currency basis, and the company hauled in $7.2 billion in free cash flow through the first nine months of 2014.
Walmart is not going down without a fight this holiday season either. The firm posted an impressive 21% year-over-year jump in e-commerce sales during the third quarter, and stores in the US will now be matching any prices from Amazon or any other online retailer. The company’s new Neighborhood Market stores should help compete in the dollar store arena, and the executive suite will be offering discounts over longer time periods this holiday season than it has traditionally done. All things considered, Walmart is navigating the tumultuous environment the best it can, and we are pleased.
Our biggest concerns related to its rival Target have had to do with lingering issues related to the well-publicized credit-card breach coupled with growing losses in its Canada growth experiment. In the firm’s third quarter, however, management was able to overcome these two headwinds to post better-than-expected results. US segment comparable sales grew 1.2%, better than Walmart’s mark and the firm’s previously-issued guidance range, while the executive suite noted that digital sales leapt more than 30%, which was also better than Walmart’s growth during the same period.
Target’s third-quarter adjusted earnings per share came in at $0.54, which was above the expected range of $0.40-$0.50, and management noted that it is encouraged by improving trends throughout the year. The company’s Canadian segment sales advanced a whopping ~44% off a relatively small base, but the executive suite noted that comparable sales were impacted by “market densification,” implying that in some Canadian markets, Target’s opportunity is becoming more and more limited. Operating losses in Canada fell to $211 million in the third quarter from $238 million in the year-ago period, which we’re viewing as progress. The midpoint of the company’s outlook for 2014 calling for earnings per share of $3.15-$3.25 was slightly higher than the $3.19 per share consensus number.
Wrapping Things Up
It’s hard to dislike either Walmart or Target. Both companies aren’t going away anytime soon, and both seem to be taking encroaching online competition in stride. We think readers should pay most attention to the valuation, as it’s likely that opportunities can be had upon sell-offs. We don’t plan on adding either Walmart or Target to the newsletter portfolios, but that doesn’t mean they are terrible companies. At the very least, they are core to the watch list.