Week In Review: Wal-Mart, Costco And Target

Nothing significant happened in the U.S. retail market this week as Wal-Mart (NYSE:WMT) persisted with its lack of interest in Family Dollar, even as Dollar General and Dollar Tree entered a bidding war for the same. Cheap Chic retailer, Target (NYSE:TGT), had its investment rating downgraded by a couple of research groups as data breach repercussions, botched up Canadian operations and edgy U.S. retail environment continued to trouble it. However,  Costco (NASDAQ:COST) brightened retail news as it reported its best monthly comparable sales growth since December 2012. Here’s a quick roundup of the news that mattered for the retailers that we cover.

Wal-Mart – Lack of Interest in Family Dollar

While competition in the urban retail market is heating up as Dollar General and Dollar Tree are trying to acquire Family Dollar, Wal-Mart has been surprisingly quite. A few weeks back, Family Dollar agreed to sell itself to Dollar Tree for $8.5 billion, after which Dollar General pitched a better offer of $8.95 billion. After Family Dollar rejected this offer, Dollar General upped its bid to $9.1 billion this week. It seems clear that Dollar chains are threatened by Wal-Mart’s aggressive small store expansion and they are trying hard to gain an upper hand.

Although several investors were expecting Wal-Mart to enter the bidding war, the retail giant hasn’t shown any interest so far. Even if Wal-Mart buys Family Dollar, it would have to spend a significant amount to restructure dollar format to fit its Express format. Family Dollar’s stock appears overpriced and it doesn’t generate enough revenues to justify a buyout offer in excess of $9 billion. Although Wal-Mart has an opportunity to acquire a large asset base for an insignificant amount (by its standards), operating and restructuring costs will hurt its bottom line.

We estimate revenues of about $485 billion for Wal-Mart in 2014, with earnings per share of $5.45, which is slightly above the market consensus of $5.37-$4.89, compiled by Thomson Reuters. We currently have a $79 price estimate for Wal-Mart, which is about 5% premium to the current market price.

Costco – Continued Growth Momentum

Warehouse giant, Costco, released its August sales results this week, which were meaningfully better than analysts estimates. The company reported comparable sales growth of 7%, while the consensus estimate stood at 5%. Comparable sales in the U.S. increased by 6% and they climbed 8% in international markets, excluding the impact of currency fluctuations and lower gas prices. ^[1] August was the best month for Costco in terms of comparable sales growth since December 2012. However, the retailer hasn’t failed to impress in the last 12 months as well. Its comparable sales growth has been around 5% every month in the last one year.

In other news, Costco agreed to pay a penalty of $335,000 to settle Clean Air Act Charges, as it was accused of letting refrigerant R-22 leak in atmosphere during repair and maintenance of its refrigeration systems between 2004 and 2007. The company also stated that it will take proactive actions to prevent the emission of greenhouse and ozone-depleting gases. ^[2]

We estimate revenues of about $114 billion for Costco in Fiscal 2014, with earnings per share of $4.93, which is slightly above the high end of market consensus of $4.64-$4.51, compiled by Thomson Reuters. We currently have a $123 price estimate for Costco, which is roughly inline with the market price.

Target – A Dull Week with Downgraded Ratings

Cheap chik retailer, Target, received an underperform rating from Zacks in a research report published on Thursday. Zacks now has a target price for the retailer at $54. Before Zacks, analysts at Telsey Advisory had slashed their estimate for Target from $69 to $66, and MKM Partners had reiterated its neutral rating for the company. However, last month, Morgan Stanley had raised its target price for the company from $58-$61. Currently, the consensus estimate for Target’s stock stands at $56.62, which is about 7% below its current market price. ^[3] Our price estimate for Target stands at $67, implying a premium of close to 10% to the market price.

In other news, a Massachusetts Consumer Affairs and Business Regulation report released on Thursday stated that about 1.2 million residents in the region had their personal and credit/debit card information compromised in 2013. The report also claimed that Target alone accounted for about 80% of the residents affected by the data breach. ^[4] In addition, mid way through the week, Target announced that it will now provide flu vaccinations at all Target Pharmacy and Target Clinic locations in the U.S. ^[5]

We estimate Target to generate $75.60 billion in revenues in 2014, while the consensus estimate stands at $74.50 billion.

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1. Costco Wholesale Corporation Reports August, Fourth Quarter, and Fiscal 2014 Sales Results, Costco, Sept 4 2014 [↩]
2. Costco to Pay $335,000 to Settle Clean Act Air Charges, The Wall Street Journal, Sept 3 2014 [↩]
3. Target Earns “Underperform” Rating from Zacks, SleekMoney, Sept 4 2014 [↩]
4. Data thefts hit 1.2 million Mass. residents in 2013, The Boston Globe, Sept 4 2014 [↩]
5. Flu Vaccines Are Now Available at All Target Pharmacy and Clinic Locations, Market Watch, Sept 4 2014 [↩]