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Walmart’s solid earnings report bodes well for certain competitors.
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Walmart’s earnings are in. Now it’s time for other retailers to step up.
Walmart
(ticker: WMT) delivered a better-than-expected fourth quarter ahead of the open Thursday, while also raising its dividend. The behemoth noted expected headwinds, like supply chain difficulties and continued Covid-19-related costs, but managed an impressive expansion of gross margins. Walmart also said it was on track to meet its 2023 financial targets.
While not a perfect quarter, there were plenty of positives. That puts the onus on big box rival Target (TGT), which is slated to report its own holiday-quarter results on March 1.
Target was just as much a winner as Walmart throughout the pandemic, but unlike in years past, Target didn’t provide a holiday update ahead of fiscal fourth-quarter results. That might be a bit troubling in itself, given that companies usually aren’t shy about highlighting strong trends. And with a fairly muted outlook from Walmart, it wouldn’t be surprising if Target’s forecast was, too.
However, Target’s lower valuation provides the stock some more breathing room, as it changes hands at less than 16 times forward earnings. While the shares could suffer if Target’s trends turn out to be not quite as strong, Walmart’s ongoing gains in grocery could bode well for its competitor—suggesting consumers continue to turn to big box retailers for this category at the expense of traditional supermarkets.
Indeed, online sales may account for a fifth of all grocery business in just four years, making dominance in e-commerce all the more crucial for this area of retail. Once one of the major analog holdouts, grocery sales have now catching up with retail’s digital shift: Covid fears pushed consumers to buy online, and they have grow accustomed to the convenience.
That’s been good news for Walmart, but potentially worrisome for its supermarket peers like
Kroger
(KR). Walmart’s size gives it the ability to muscle to the head of the line in terms of supply-chain issues—which the company said it navigated well in the quarter, despite recording a $400 million headwind. The retail giant also has a greater financial cushion to absorb inflation costs while keeping prices low.
Smaller food retailers don’t have that luxury, and appear to be lagging behind in the digital race, too. Nearly three-quarters of shoppers had ordered groceries online in the last 90 days, according to recent data from digital marketing firm Chicory. More than a third said Walmart was their e-commerce retailer of choice, putting it well ahead of the competition, including
Amazon.com
(AMZN). Traditional grocers didn’t crack the top five.
Walmart and
Costco Wholesale
(COST) are BMO Capital Markets analyst Kelly Bania’s top picks for food retail, although she also highlights Target and
Dollar General
(DG). “We continue to expect a more price sensitive consumer environment as we move through 2022 and recommend owning food retailers with aggressive price positioning,” she writes.
On the bright side, promotions appear to have remained relatively in check, which could help margins across the industry.
As for dollar stores, Walmart’s results could be a positive sign for Dollar General and
Dollar Tree
(DLTR), both scheduled to report next month.
“Walmart lowered the temperature a bit around the concerns about the consumer,” says Stephens analyst Ben Bienvenu. “They don’t have a crystal ball, but theirs is about as clear as anyone’s, and they say they expect the consumer to be pretty healthy this year …that’s no doomsday outcome.”
The lower-income shopper is still spending despite headwinds, which means dollar store sales may not be as affected as some have feared. An emphasis on bargain hunting could help as well. “Walmart is a destination in a high-price environment,” Bienvenu says. “I would expect that other value-oriented retailers will become destinations for increasingly cash-strapped consumers as well.”
Write to Teresa Rivas at [email protected]
https://www.barrons.com/articles/walmart-target-earnings-retail-stocks-51645119664