Indeed, the most recent reports suggest a rise in retail spending, as the Commerce Department showed a 0.8% uptick in sales for July, a nice surprise for everyone. The numbers might not have screamed “bullish,” but recent results from Macy’s (NYSE:M), Michael Kors (NYSE:KORS), Nordstrom (NYSE:JWN) and Abercrombie and Fitch (NYSE:ANF) suggest the buying is broadening along the retail spectrum.
So it goes for Wal-Mart and Target, both of whom delivered earnings this week that suggest the uptick also is alive and well in the discount space. They go about it in different ways, and with newly updated numbers at our fingertips, it’s a good time to see how both are doing, and how investors should view each of the retailers.
(In the interest of full disclosure: As a consumer, I don’t care for either company, but I have to admire their success. If nothing else, that bodes well for an unbiased basis for comparison.)
Wal-Mart might not be the author of the big-box model, but it is the name most associated with the term. Its strategy has not changed since Sam Walton founded the company: lowest prices all the time — period.
Now, understand that beneath that mantra is some serious retailing insight and creativity, including starting Sam’s Club, introducing groceries into the stores, and in-store “banking” for consumers.
But at the end of the day, Wal-Mart is about discounting — that means squeezing every price point along the supply chain to drive down costs, then passing the savings along to its loyal customers. Wal-Mart has made that model work for 50 years, as it evolved from a local Arkansas operation to a $240 billion market-cap operation.
Wal-Mart is one of InvestorPlace‘s Dependable Dividend Stocks, and why not? The company has paid a dividend since 1973 — one that it has steadily increased to a current quarterly payout of 40 cents, good for a 2.2% yield. And in terms of an investment, WMT shares are up more than 40% in the past two years — and they have improved more than a thousand-fold since going public! WMT shares are trading near all-time highs, yet its respective trailing and forward P/E’s of 15.5 and 13.5 are perfectly reasonable.
Wal-Mart’s second-quarter results showed nice 6% growth from last year, coming in at 1 cent per share better than analyst estimates. It grew revenues 3.8% to $113.5 billion, though that number came up shy of forecasts — but it did so on comparable-store sales growth of 2.2%, the fourth consecutive improvement against that measure.
But what about future growth? Well, WMT will continue to add stores throughout the U.S. And if you think Wal-Mart doesn’t have many more places to expand, take my word for it: If it can put a store outside of Denton, Md., it can find space for one anywhere. The company always has room to grow profits, too, though Thursday’s bump in forward-looking earnings and revenues represent very small improvements, and performance might be helped more by the company’s continued share repurchase program.
My concern: All the company talks about is how it continues to stress price as its main competitive advantage. “Lowest price” for the customer base in a difficult economy is about all Wal-Mart has to offer. Don’t get me wrong — it’s a tried-and-true model, but …
… well, let’s take a look at another model and get back to that.