Image Source: Mike Mozart
Walmart and Target have taken a few body blows from Amazon, but the fight is far from over. Walmart is executing much better than Target at the moment.
By Brian Nelson, CFA
Shares of Walmart (WMT) are now approaching $80 per share following a combination of a strong market tailwind and first-quarter results, released May 18, that revealed that, while the discount retailer may have taken its share of blows from Amazon (AMZN) the past few years, it is not out of the fight by a long shot. Excluding currency fluctuations, total revenue during the first quarter of 2017 advanced 2.5% thanks in part to solid performance at Walmart US, where comparable store sales advanced 1.4% due entirely to higher traffic. E-commerce growth at Walmart US experienced impressive gross merchandise volume (GMV) growth of nearly 70%, with most of the expansion organic. In September 2016, Walmart completed its $3 billion acquisition of Jet.com, and we expect the company’s e-commerce initiatives to continue to bear fruit. Operating cash flow generation was healthy at $5.4 billion during the quarter, and Walmart returned $3.7 billion to shareholders through dividends and share buybacks. Walmart US comparable store sales are expected to leap 1.5%-2.5% during the second quarter, and we think the target range is achievable. Free cash flow generation was a solid $3.4 billion during the first quarter, and its Dividend Cushion stands at parity (1). Walmart yields ~2.8% at present.
Walmart has had its hands full navigating the current tumultuous environment as wage rate inflation adds to operating costs and as negative public perception weighs on the top line. Amazon continues to steal share from the retailer, but we were very encouraged by improved traffic trends in the US and a pace of e-commerce growth at Walmart.com that would be the envy of any national retailer, large or small. Walmart has a lot of strategic options, too. A spin off of Sam’s Club would force the market to more tangibly perform a sum-of-the-parts analysis on the equity, perhaps building in a premium from offering the market more choices. Comparable sales at Sam’s Club advanced 1.6% (ex-fuel) in the first quarter, better than consensus, so momentum continues at the membership warehouse that competes head on with Costco (COST). Many have noted that Wayfair (W) could be a viable acquisition candidate for Walmart, and we’ll be watching the M&A front closely. Walmart’s 12% stake in JD.com (JD) is a gem of an asset, and Store No 8, Walmart’s innovation hub, could yield some very interesting results in coming years. Rivalries remain fierce across every front, however, and pricing pressures, from groceries to packaged goods and beyond, may never go away. Facebook (FB) could become a big contender, too, with the social media giant rolling out a food ordering option. GrubHub’s (GRUB) shares didn’t react well to this.
Walmart has come roaring back, but shares of Target (TGT) continue to languish, now trading in the mid-$50s from the mid-$80s in early 2016. We had warned about Target when we thought its deal with CVS (CVS) and its decision not to continue to invest in Canada were major long-term blunders. We explained our negative outlook for Target in our May 2016 note, “Target and Non-GAAP Earnings.” At the time, we explained that we didn’t like the short-term nature of Target’s executive incentive structure and that it had led management astray, leading it to give up on some key long-term growth avenues. Target’s first-quarter results, released May 17, weren’t bad, but revenue still declined 1.1% from the prior-year period. Though comparable digital sales at Target advanced 22% in the quarter, first-quarter comparable sales fell 1.3%, and unlike in the case of Walmart, traffic fell. We’re not convinced that Target is completely out of the woods, and we’re a bit concerned both traffic and digital performance continue to lag behind Walmart’s efforts, especially with Amazon nipping away at both big box giants. For the full-year 2017, Target expects a low-single-digit decline in comparable sales. Shares of Target yield ~4.4%, and its Dividend Cushion ratio isn’t bad. We’re watching shares closely.