Retail Week In Review: Wal-Mart, Target & Costco

Last week, National Retail Federation (NRF) released an optimistic sales growth forecast for the upcoming holiday season. It predicts retail sales during November and December 2014 (excluding gas, autos and restaurant sales) to increase by 4.1%, while they increased by just 3.1% last year. ^[1] While retailers will be encouraged by NRF’s recent forecast, prevailing uncertainty in consumer spending behavior cannot be ignored. Shoppers are likely to remain extremely price conscious during the season, and hence competition in the industry will be intense.

Apart from NRF’s forecast, there weren’t any significant news for U.S. retailers, except Costco (NASDAQ:COST) releasing its Q4 fiscal 2014 earnings. Wal-Mart (NYSE:WMT) eliminated health care benefits for part-time employees and Target‘s (NYSE:TGT) CEO commented on its strategies to salvage Canadian operations. Here is a quick roundup of news that mattered for these companies.

Wal-Mart – No Healthcare Benefits for Part-Timers

During the past week, Wal-Mart’s stock price remained more or less stable at around $78, despite a lowering of global growth forecast by International Monetary Fund. Early in the week, the retail giant decided to cut health benefits for most of its part-time employees, in order to address the rising healthcare cost issue. From January next year, Wal-Mart will provide health insurance  to only those employees who work more than 30 hours a week, a move which would affect 30,000 part-time workers. With increasing health-care signups weighing on the retailer’s bottomline, this move was somewhat inevitable. Out of 1.4 million workers employed by Wal-Mart, about 1.2 million have enrolled for healthcare benefits. Employee participation in health care plans has been so extensive, that the company now expects overall healthcare costs for the current fiscal to be around $500 million, up from its previous estimate of $330 million. ^[2] With the elimination of health care plans for part-time workers, this figure may come down next year.

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.

Target – Every Canadian Store Matters

The past week was mostly uneventful for Target, barring its CEO’s interview with BNN television in which he commented to the company’s Canadian business. During the interview, Brian Cornell stated that Target executives are reviewing performances of every store in the region to identify its problems on a store-by-store basis. While aggressive expansion and weak inventory management were largely responsible for Target’s dismal debut in Canada, Mr. Cornell wants to identify issues specific to every store. He also added that if the company’s efforts to augment supply chain do not yield fruitful results, certain number of stores will be closed to lessen margin pressure. ^[3] We believe that the upcoming holiday season is going be crucial for Target Canada, as it can pave the way for the company’s future in the country.

We estimate Target to generate $75.60 billion in revenues in 2014, while the consensus estimate stands at $74.50 billion. Our price estimate for Target stands at $67, implying a premium of more than 10% to the market price.

Costco – Earnings Beat

Costco’s shares went up slightly last week as its Q4 fiscal 2014 results came in ahead of the market consensus, and it received a Target price upgrade from Deutsche Bank. The company’s Q4 revenues increased 9% to $35.52 billion, marginally ahead of analysts’ estimates of $35.47 billion. It reported 13% growth in its earnings per share to $1.58, beating the consensus estimate of $1.52. Strong rise in new membership signups, increase in membership income and robust online growth helped Costco report better-than-expected results. On the investment rating front, the warehouse giant is doing very well. About 65% of analysts covering Costco have maintained ‘buy’ or better investment ratings for the company. Last week, Deutsche Bank increased its target price for Costco from $130 to $135. ^[4] With analysts upgrading their investment ratings for Costco, the company’s VP Joseph P. Portera sold 4,685 shares later in the week at a price that was slightly above Costco’s market price. ^[5]

We estimate revenues of about $122 billion for Costco in Fiscal 2015, with earnings per share of $5.38, which is slightly above the high end of market consensus of $5.36-$4.85, compiled by Thomson Reuters. We currently have a $123 price estimate for Costco, which is just below the current market price.

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1. OPTIMISM SHINES AS NATIONAL RETAIL FEDERATION FORECASTS HOLIDAY SALES TO INCREASE 4.1%, National Retail Federation, Oct 7 2014 [↩]
2. Wa-Mart cuts health benefits for 30000 part-timers, CNN Money, Oct 8 2014 [↩]
3. Target Corp CEO says every Canadian store ‘has to improve’ as bare shelves continue to plague retailer, Financial Post, Oct 8 2014 [↩]
4. Analyst Upgrades: Costco Wholesale Corporation, ARM Holdings plc (ADR), and Splunk Inc, schaeffersresearch, Oct 8 2014 [↩]
5. Costco Wholesale VP Joseph P. Portera Sells 4,685 Shares (COST), Mideast Times, Oct 10 2014 [↩]