Wal-Mart Stays Stingy On Discounting, Still On Target For $66 Stock Price

Prices are low but no lower than usual

Wal-Mart seems to be adopting a mixed approach to drive holiday sales instead of just purely discounting all the products to drive store volumes.

While this signals the retailer’s increased confidence for holiday shopping, it also represents a broader development that the U.S. consumer might finally be growing more confident with regard to economic outlook. ?This should also benefit other retailers that compete with Wal-Mart like Costco, Target and Sears.

This bodes well for Wal-Mart as we maintain our bullish take on the company driven by expected improvements in sales metrics (like revenue per square foot) and stable profit margins. Our price estimate for Wal-Mart’s stock currently stands at $65.42, which is about 22% above current market price.

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Retracting Some Initial Price Rollbacks ?

While the economic growth has been sluggish in 2010, there were indications that the fourth quarter might be stronger than expected from early reports. October data suggested that due to payroll increases and improved employment, the 4th quarter would be strong. ^[]

Then November retail sales data released last week prompted economists to boost their forecasts even further. ^[]With confirmation that consumers are willing to spend this holiday, Wal-Mart decided to ease up on its initial price rollbacks on many items. We believe this will help support margins as the retailer can drive sales without heavily discounting.

Smartphone Discounts Could be Strategic

Wal-Mart is maintaining its discounts on smartphones like Apple’s iPhone 4. ^[] Given that smartphones are some of the hottest selling items this holiday season and Wal-Mart wants to both attract customers and improve its sales metrics like revenue per square foot, this strategy makes sense. The retailer is increasingly moving into selling consumer electronics – a topic we discussed in a recent article Will Best Buy?s Earnings Miss Weigh on Wal-Mart? – and is one of the key beneficiaries of Best Buy’s recent stumbles in its holiday sales push.

As we enter the home stretch on holiday sales, we expect to see some strong numbers out of Wal-Mart.

You can see the complete $65.42 Trefis price estimate for Wal-Mart’s stock here.

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Best Buy Got Hammered So Is Wal-Mart Next?

Big miss at BBY makes you wonder

Wal-Mart is well positioned to take advantage of the improving economy sand uptick in consumer spending more than Best Buy is. Best Buy’s recent earnings release was followed by a massive 15% decline to its stock price. This was primarily a result of drop in quarterly profit due to erosion of market share and weaker demand for TV sets and entertainment products.

While Best Buy’s price fall has been accompanied by decline in stocks of GameStop and Radio Shack, Wal-Mart’s stock in fact saw slight gains. We believe that Wal-Mart is unlikely to feel the pressure of weak earnings of the electronic retail giant Best Buy.

Sentiment Gains

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Concurrent with Best Buy’s earnings release, several positive reports concerning consumer spending and business confidence were released. U.S. retail sales for November have turned out to be greater than expected and consequently economists have boosted their forecasts for overall Q4 2010 retail sales. ^[] Recently announced tax cuts in the U.S. are likely to aid in continuation of the momentum in 2011. Additionally, according to a recent survey the business confidence has risen significantly and business leaders are expecting increased sales, investments and hiring going forward. ^[]

Wal-Mart’s Broad Appeal & Efforts

Since consumer spending improvement is still in its early stages, Wal-Mart’s broad assortment of products & goods as well as its appeal to budget conscious consumers bodes well for sales compared to electronics focused Best Buy. Its proposition of Every Day Low Prices seems to be drawing customers.

Additionally, Wal-Mart’s decision of aggressively pursuing electronics retailing after closure of Circuit City in 2009 seems to be paying off. The company has been able to offer several deals on electronics to grab some of the share from Best Buy. Although Best Buy’s share losses were also aggravated by its focus on mobile business over recent holiday shopping season. ^[]

Not only this but Wal-Mart has also stepped up its online retail efforts to increase convenience for customers and drive sales during the holiday season. We recently wrote an article (Wal-Mart’s Online Push – Does it Make Sense?) where we discussed Wal-Mart’s online push and its free shipping offering. It looks like the company has taken several strategic steps to take advantage of improving economy and drive share gains. This bodes well for its revenue per square foot figures, however it could potentially impact profit margins negatively.

You can see the complete $65.42 Trefis price estimate for Wal-Mart’s stock here.

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Gap Will Get To $34 But Wal-Mart Tactics Don’t Help

Stock is on a comeback but promotions could take a bite

Gap, a leading global specialty retailer, reported its third quarter 2010 results on November 20. Gap competes with other specialty retailers like Aeropostale, Abercrombie & Fitch, J.Crew Group and Urban Outfitters.

With Black Friday deals, we noticed a flurry of promotional activities such as Wal-Mart and Best Buy’s free shipping promise, but we believe that aggressive promotions might also hurt some retailers including Gap. In particular, we are concerned that aggressive pricing campaigns could lead to margin pressure causing us to adjust our optimistic $34 Trefis price estimate for Gap’s stock.

Consumer Outlook Modestly Improving

Recent consumer data and some earnings make us cautiously optimistic on the consumer as we head into the holidays. As the outlook for the US brightens versus easy comparables last year, we could see a confidence for retailer stocks tick higher as the holiday season gets underway, especially following the announcement of J. Crew’s potential buyout.

We are generally growing more positive on the retailers, and we expect that major specialty retailers like Gap, Abercrombie & Fitch and American Eagle will see decent sales figures this holiday season in part due to increased promotional activities.

Last week we wrote that Abercrombie’s earnings gave us increased confidence in its profit margin and sales metrics outlook. (See Abercrombie & Fitch Sales, Profitability Lift Outlook)

With Gap on the other hand, we saw an increase in its inventory per square foot by 9% at the end of third quarter 2010, which may lead to increased markdowns in order to drive sales and add pressure to profit margins. While we are still positive on the stock, we need to watch this.

Lower Margins From Promotional Activities
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We are concerned that aggressive promotional activities this holiday season could provide some downside risk to our current profit margin forecasts. We expect EBITDA margins (a profit margin measure) to trend modestly higher from around 15% currently to around 17% in the coming years. However if this drops to 12%, this would reduce our price estimate by around 5%.

See our full estimates for Gap here.

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On Deck Next Week: Wal-Mart Reports

• November 12, 2010, 6:11 PM ET

By Kathy Shwiff

Everett

• Dow Jones Industrial Average components Wal-Mart and Home Depot Inc. and nearly two dozen other companies in the Standard & Poor’s 500 Index will report quarterly results next week. Wal-Mart and Home Depot both report Tuesday, a day after Nordstrom Inc. and Lowe’s Cos. Target Corp. will post results Wednesday, followed by Gap Inc. and Sears Holding Corp. on Thursday.
• General Motors is expected to price its initial public offering of 365 million shares Wednesday evening. The estimated price range is $26 to $29. The IPO allows the U.S. to begin offloading the stake it acquired through last year’s rescue of the auto industry. GM will have about 1.5 billion shares outstanding afterward, and the Treasury Department’s stake will fall to as little as 41% from the current 61%.
• Measures of wholesale and consumer inflation likely rose for October, according to economists surveyed by Briefing.com. The Producer Price Index, to be released Tuesday, and Consumer Price Index, out Wednesday, are expected to rise 0.7% and 0.3%, respectively. For September, the PPI grew 0.4% and the CPI ticked up 0.1%.
• The government will report on October retail sales and September business inventories Monday and will release October industrial-production figures Tuesday. Data on October housing starts and building permits will be issued Wednesday.
• On Thursday, the nonprofit Conference Board will release its October index of leading indicators and the Philadelphia Fed will report on regional manufacturing activities.
• Among appearances by Federal Reserve officials: Richmond Fed President Jeffrey Lacker will speak Sunday; Atlanta Fed President Dennis Lockhart is on tap Tuesday; St. Louis Fed President James Bullard will speak Wednesday; Minneapolis Fed President Narayana Kocherlakota appears Thursday in Chicago; Philadelphia Fed President Charles Plosser will speak Thursday in Washington; and Chairman Ben Bernanke will speak next Friday at the 6th European Central Bank Banking Conference in Frankfurt.
• President Obama has invited Senate Minority Leader Mitch McConnell (R., Ky.) and other congressional leaders to the White House on Thursday to talk about Bush-era tax cuts and other issues. Even though Republicans chalked up big gains during the midterm elections, those new members won’t be sworn in until January, and Democrats will still control both chambers of Congress until then. Obama will need support from at least a few Senate Republicans to pass any bill related during the lame-duck session, giving McConnell a direct say on what any deal might look like, especially regarding taxes.

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On Deck Next Week: Wal-Mart Reports

• November 12, 2010, 6:11 PM ET

By Kathy Shwiff

Everett

• Dow Jones Industrial Average components Wal-Mart and Home Depot Inc. and nearly two dozen other companies in the Standard & Poor’s 500 Index will report quarterly results next week. Wal-Mart and Home Depot both report Tuesday, a day after Nordstrom Inc. and Lowe’s Cos. Target Corp. will post results Wednesday, followed by Gap Inc. and Sears Holding Corp. on Thursday.
• General Motors is expected to price its initial public offering of 365 million shares Wednesday evening. The estimated price range is $26 to $29. The IPO allows the U.S. to begin offloading the stake it acquired through last year’s rescue of the auto industry. GM will have about 1.5 billion shares outstanding afterward, and the Treasury Department’s stake will fall to as little as 41% from the current 61%.
• Measures of wholesale and consumer inflation likely rose for October, according to economists surveyed by Briefing.com. The Producer Price Index, to be released Tuesday, and Consumer Price Index, out Wednesday, are expected to rise 0.7% and 0.3%, respectively. For September, the PPI grew 0.4% and the CPI ticked up 0.1%.
• The government will report on October retail sales and September business inventories Monday and will release October industrial-production figures Tuesday. Data on October housing starts and building permits will be issued Wednesday.
• On Thursday, the nonprofit Conference Board will release its October index of leading indicators and the Philadelphia Fed will report on regional manufacturing activities.
• Among appearances by Federal Reserve officials: Richmond Fed President Jeffrey Lacker will speak Sunday; Atlanta Fed President Dennis Lockhart is on tap Tuesday; St. Louis Fed President James Bullard will speak Wednesday; Minneapolis Fed President Narayana Kocherlakota appears Thursday in Chicago; Philadelphia Fed President Charles Plosser will speak Thursday in Washington; and Chairman Ben Bernanke will speak next Friday at the 6th European Central Bank Banking Conference in Frankfurt.
• President Obama has invited Senate Minority Leader Mitch McConnell (R., Ky.) and other congressional leaders to the White House on Thursday to talk about Bush-era tax cuts and other issues. Even though Republicans chalked up big gains during the midterm elections, those new members won’t be sworn in until January, and Democrats will still control both chambers of Congress until then. Obama will need support from at least a few Senate Republicans to pass any bill related during the lame-duck session, giving McConnell a direct say on what any deal might look like, especially regarding taxes.

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