Battle of the Retail Titans

by Jim Woods | November 20, 2009 5:14 am

Black Friday is coming, and this year everyone wants to know which stores are going to capture the hearts, minds and wallets of the 2009 holiday shopper.  Though actual sales figures are impossible to predict, what I can tell you is that recent past is often prologue.  Holiday shoppers usually don’t just decide to patronize a store they rarely shop at just because Black Friday has arrived.  Human beings are largely creatures of habit, and given this psychological bent, it’s likely that the retailers that have seen solid revenues in the most recent quarter are the ones that are most likely to capture our holiday shopping dollars this season.

  Is Buffett Playing It Safe with Wal-Mart (WMT)?[1]

Now, with this thesis in place, let’s take a look at three retail battlefronts, each with two dominant titans.  By examining how well these respective companies have performed in the recent past, both in terms of earnings and in terms of their stock price, we can get a good sense of which ones will have the better Black Friday—and which ones deserve to get your holiday investment dollars.

Online Retailers – Amazon vs. eBay

Holiday shopping hasn’t been the same since (AMZN[2]) and eBay (EBAY[3]) became household names.  We all are doing a lot more online shopping these days, and that’s especially true during the holidays.  In fact, there is so much holiday shopping going on via the Internet that there’s even a term coined for the trend: Cyber Monday, which refers to the Monday immediately following Black Friday, and which has now become the official beginning of the online shopping season.

So, which online retailer is better positioned for Black Friday and Cyber Monday?

Last month, Amazon opened the books on a huge earnings beat.  The online retailer reported third quarter earnings surged 68% from the same period a year ago, due largely to a strong increase in sales. Unlike so many other retailers we’ve seen over the past few quarters whose revenues have declined, but who have met bottom line estimates due to cost-cutting, did it the old-school way: by selling more stuff.

Amazon’s stellar third quarter performance easily bested Wall Street expectations, and the company expects much the same outcome for the holiday season.  Along with its third-quarter earnings release, Amazon predicted revenue in the range of $8.125 billion to $9.125 billion, well above Wall Street’s expectations for sales of $8.13 billion.

About the same time Amazon released its third quarter results, we saw rival eBay present its third quarter numbers. The company’s bottom line did manage to best consensus Street revenue and earnings numbers, but that wasn’t the whole story.  The company’s outlook for the holiday shopping season came in at the low end of expectations.  For the coming quarter, eBay sees adjusted earnings to range between 38 cents to 40 cents per share. The Street wanted to see a forecast of a solid 40 cents per share.

But what about the price action in these two stocks?  What are investors saying about the future fate of Amazon and eBay?  Well, over the last three months EBAY shares have gained a respectable 8.36%.  AMZN shares, however, have done a little bit better.  That stock is up 56.13% over the same period.

The clear winner here is Amazon, and I suspect it will be the victor in the online retail wars this holiday season. I think Amazon will also continue being a winner for your retail investment dollars.

Discount Fashion Retailers—TJ Maxx vs. Ross

It’s been my experience that when it comes to discount fashion shoppers, they are usually either TJ Maxx (TJX[4]) fans, or they’re Ross (ROST[5]) fans.  They could also be Marshall’s fans, but that store also is a member of the TJX Company family.  I must admit that I shop at both of these stores, as I like getting value for my fashion dollar.  And judging by both retailers’ latest numbers, a lot of people are turning toward getting the most for their fashion buck.

TJX Companies recently reported its results for the third quarter, with the bottom line figure of 81 cents per share besting Street estimates by a penny.  This was the second-consecutive quarter of better-than-expected numbers for TJX, and that is always a bullish sign as we head into the holiday shopping season.  But the real bullish sign for the shares going forward was the company’s estimated same-store sales growth for the final three months of the year.  TJX expects a 5% to 7% increase in this all-important metric, a very strong number that, if achieved, will be great for the company’s fourth quarter bottom line—and great for the stock.

Ross stores also recently reported results for the third quarter, and though the numbers were about what the Street had anticipated, the company said its fourth quarter earnings would essentially remain the same as earlier forecasts.  In numerical terms, Ross said earnings for the holiday quarter would likely come in between 88 cents per share and 94 cents a share, well below estimates for earnings of 99 cents a share.  

The Ross fourth quarter forecast is almost a polar opposite of the TJX forecast.  Sure, both companies are going to make money this holiday season, but TJX appears to be on a strong upward trajectory, while Ross appears to be headed downward.  

In terms of share price, over the past three months, Wall Street has handed TJX a 9.85% gain. This is a big difference when compared to ROST shares, as the stock actually fell 0.71% over the same period.  

There’s no doubt about it, the winner in the discount fashion retail wars is TJX.

Discount Retail Giants—Wal-Mart vs. Target

Our final Battle Royale is between discount retail giants Wal-Mart (WMT[6]) and Target (TGT[7]).  Both of these companies have done an outstanding job of providing value to cost-conscious consumers during this recession, and both are collecting a whole lot of shopper dollars.  Yet both companies are admittedly facing tough times going into the holiday season.

Although Wal-Mart did beat analysts estimates in the most-recent quarter on both rising sales and increased earnings, the company’s key same-store sales figures fell 0.4%.  But what’s really a concern is the company’s holiday quarter forecast.  Wal-Mart said same-store sales will be flat, or even down 1% over the coming quarter.
Never one to take a potential same-store sales slump lying down, Wal-Mart is trying desperately to bring as many customers in as possible for the holidays by ramping up advertising and slashing prices on scores of holiday gift items.

As for Target, well, things aren’t much better. The company did report an 18% rise in earnings for the third quarter, a rise that broke a string of eight consecutive quarterly declines.  However, its fourth-quarter outlook was less than exuberant.  One company official even said his firm faces “lingering, nasty losses” in states hit hardest by the recession such as California, Arizona, Nevada and Florida.

Target said it expects earnings of $1.12 per share for the fourth quarter, but it acknowledged that many factors would need to fall into place to meet or exceed that number. And even if Target does hit its holiday earnings target, that still would be below consensus estimates for earnings of $1.14 per share.  Finally, to make matters worse, TGT shares were just downgraded by Goldman Sachs.

In terms of share price, both WMT and TGT are running neck and neck over the past three months.  WMT has risen 4.72%, while TGT shares have climbed 5.74%.

While WMT is a better choice than TGT for your Black Friday investment dollars, I think you’d be much better off doing your holiday stock shopping at TJX or AMZN.

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