Walmart has the advantage for back-to-school — and that’s really bad news for this retail stock
As back-to-school shopping season kicks into high gear, Walmart seems to be in a sweet spot, while Target is losing ground with its core customer. This long period of sticky inflation has produced savvy consumers, who are very deliberate about where they spend their money. This behavior matters, as it can make or break certain retailers. Consumers “are spending, but they’re being more particular than they were before in terms of what they’re spending on,” said Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management, in a recent media call. “So for example, we’re seeing more people shopping at Walmart than we saw earlier in this year because they’re saying, okay, ‘we’ll make a trade’ and we’ll go generic or off-brand or find a price point that fits.” Analysts agree this plays to Walmart’s strengths as its brand is so closely linked to its everyday low prices slogan. In assuming coverage at an overweight rating on July 10, Piper Sandler analyst Peter Keith said Walmart has used the inflationary environment to expand its market share. Notably, the retailer has successfully wooed upper-income shoppers. “WMT’s superior omni-channel offering provides convenience, while its impressive remodel effort reshapes the appearance of a traditional WMT store,” Keith said. WMT YTD mountain Walmart shares year to date Walmart hopes to refresh all its U.S. stores by 2027, and it often sees a sales boost of around 10% when the remodel is completed, according to Keith. Walmart shares have outperformed the market. As of Wednesday’s close, the stock has risen 35% since the start of 2024, compared with a 17% gain for the S & P 500 and an 8% increase for the SPDR S & P Retail ETF (XRT) . Analysts remain overwhelmingly bullish on the stock with more than 80% of analysts rating shares a buy or overweight, according to FactSet. That said, the average target price of $73.29 implies just a little bit of upside ahead. Highly promotional season The set-up for the second busiest shopping period of the year suggests a highly promotional environment lies ahead of retailers in the second half of the year. Amazon just completed its two-day Amazon Prime Day shopping extravaganza, but rivals like Walmart and Target tried to front-run the e-commerce giant with their own summer sales. Benchmark analyst Daniel Kurnos, who covers Amazon.com, said the number of “deal days” is “up materially” year over year. “We have enough faith in Amazon’s ecosystem to suggest that the doubters are more likely than not to be proven wrong but already elevated sell-side expectations may mean that the margin of error is a lot slimmer this time around,” Kurnos wrote in a research note Tuesday, about current expectations. He added that even if Amazon’s revenue forecast is “not stellar,” the focus among investors has shifted to the company’s profitability and other drivers of its growth such as AI. AMZN YTD mountain Amazon shares year to date. Year to date, Amazon’s stock is up nearly 24%, a gain that tops the market’s pace and some of the “Magnificent Seven” names like Microsoft and Apple. According to FactSet, Amazon’s average target price of $224 implies shares could rise 19% from Wednesday’s close. Except for a sole analyst with a hold rating, all analysts rate the stock a buy or overweight. The promise of bargains was clearly tempting to consumers. E-commerce sales across the two-day event tallied $14.2 billion, up 11% from last year, according to Adobe Analytics. That was slightly better than the firm’s prediction for $14 billion in online sales. Adobe said the discounts during the two-day Prime sales period peaked at about 23% for electronics, which was deeper than the 14% markdowns in 2023. Deeper price cuts were also seen in apparel (20% versus 12% in 2023), home and furniture (16% versus 9%) and televisions (16% vs 5%) as well as in toys, appliances, sporting goods and computers, the firm said. Pinched pocketbooks Retail competition is stiff because consumers have depleted the savings they socked away during the pandemic and while the pace of rising consumer prices has slowed, the months of larger grocery bills, the return of student loan payments, higher rent and soaring borrowing costs have taken their toll. “We’re seeing the consumer still being confident because … people have jobs. And so if people have jobs, they are still confident and they are still spending, but they are a lot more discerning. And they have to make choices,” said Alexis Deladerriere, head of international developed markets equity, at Goldman Sachs Asset Management. He said discretionary items will be under more pressure. This is reflected in the slowdown in sales of luxury goods because the aspirational consumer has vanished, he explained. However, many back-to-school items are non-negotiable. Children grow and need new sneakers and jeans. Notebooks and pencils must be purchased for school. What will go away this back-to-school shopping period are some of the extras. Mom and dad won’t pick up something for themselves as they browse the store for their children, and maybe last year’s backpack can make it through another year — or at least a little longer. According to Adobe, the items people were buying during Amazon’s Prime Day, Target’s Circle Week and similar events provided a huge boost to traditional back-to-school supplies. Spending in this category rose 216% over the 48-hour period compared with the typical daily sales level in June. Kids apparel spending jumped 165% on the same basis, Adobe said. JLL, a commercial real estate management services firm, polled 1,026 parents online in May about their back-to-school shopping plans, and found about a third of consumers said they planned to spend more than they did last year, while about 55% said they would spend less. Households earning less than $50,000 per year were more likely to say they were cutting their budget, according to JLL. Those consumers also were shopping carefully and said they were paying attention to the mid-July discounts. In general, the survey’s findings suggest that the lower a person’s income, the fewer stores they will shop and the more likely they would visit a mass merchandiser or a dollar store. Target losing ground The story was very different for households earning more than $150,000, the survey found. In those households, budgets were increasing considerably, and nearly 71% of their spending would be targeted to discretionary items, JLL said. Wealthier consumers tend to shop more at malls and are more likely to make purchases at several retail brands, including specialty retailers. Still, in JLL’s survey Target ceded ground to Amazon, and Costco and dollar stores were gaining mindshare among price-sensitive shoppers. JPMorgan analyst Christopher Horvers said in a June report that Target is in a “tough spot” this year. Amazon has been “leaning into consumables with faster fulfillment,” while Walmart is looking to grab more market share from shoppers browsing for general merchandise online, he said. Target is left getting bruised on both sides, according to the analyst. “WMT’s 20%+ share in grocery and the nature of the category put a limit on how high share can go, but WMT’s low (4%) share in [general merchandise] (vs. AMZN’s ~18%) is the big opportunity,” JPMorgan’s Horvers said. Target shares reflect the strain of the competition. The stock is up less than 10% year to date, underperforming the market. While slightly more than half of the analysts who cover the stock rate it a buy, according to FactSet, one analyst has it at a sell. Target doesn’t have the same draw with consumers looking to make “fill-in” trips for items that they need between large shopping trips, and that is hurting it. And if Walmart continues to win over wealthier customers, that’s more bad news for Target. TGT YTD mountain Target shares year to date Walmart’s debut of private label brand Bettergoods , which is priced above its Great Value brand, but below national brands, is one attempt to appeal to those higher income households. Its Walmart+ membership program is another. TD Cowen analyst Oliver Chen analyzed the overlap between Walmart+ and Target shoppers relative to Amazon Prime, Sam’s Club and Costco memberships, and found that there is around a 30% or more overlap with each of the programs. However, there is a smaller overlap of 26% between Walmart+ and Prime, compared with a whopping 60% overlap between Prime and Target shoppers. Walmart+ provides membership perks such as free delivery from the stores with no minimum purchase, discounted gasoline and a Paramount+ subscription, among other benefits. Chen said that nearly 80% of Walmart+ members earn more than $100,000, and he sees the program as a key part of its efforts to retain wealther customers. Meanwhile, Walmart’s automation efforts are making it more efficient, which can help it reach a goal of achieving e-commerce profits within one to two years. (Target hasn’t said when its online operations will earn money, but Chen thinks it lags Walmart.) On Tuesday, KeyBanc Capital Markets analyst Bradley Thomas reiterated that Walmart remains one of his top stock ideas. He is impressed with the company’s numerous growth initiatives, which include advertising, and how it has managed to gain market share. “The advertising business grew 28% in 2023 to $3.4B, with management previously noting average advertising company margins are typically within the 70-80% range,” he said. “We see the recently announced acquisition of VIZIO further accelerating WMT’s digital flywheel.” On Tuesday, Thomas boosted his price target 9% to a Street-high of $82.
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