6 Battling Big-Box Retailers: Who’s Winning?

by Alyssa Oursler | July 11, 2013 12:20 pm

retailshopping185[1]Big-box retailers have been making big headlines this week — some good, some bad. Costco (COST[2]), for one, just posted June same-store sales that beat analyst expectations and the stock subsequently jumped near an all-time high around $115.

Meanwhile, the company’s rival Walmart (WMT[3]) has much less to celebrate. The discounting behemoth has been in a feud with our nation’s capital over a wage bill being pushed through … and just lost.

Walmart had declared that it would cancel three of six new stores it had planned in the District if the “Large Retailer Accountability Act” — a law that requires retail stores making more than $1 billion per year at are at least 75,000 square feet large to pay their employees at least $12.50 an hour — went through. Legislators approved the bill anyway.

The discrepancy in Costco and Walmart is a prime example of the mixed bag presented by big-box retailers. Even as a few big names near all-time highs, others seem to be nearing death.

Let’s take a look at how six of the biggest names in the space have been faring, and where they’ll likely go from here.

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#2 Costco Wholesale Corp. (COST)Year-to-Date Gains: 16% (vs. 17% for S&P 500)

If slow and steady wins the race, Costco is at least a contender. The best way to describe the giant company — sporting a market cap just under $50 billion — is solid.

Back in May, Costco reported strong third-quarter numbers, including a 19% improvement in net income on the back of  increased sales and more money from membership fees[5]. And while most names in the general retail sector have seen full-year expectations slowly pared over the last few months[6], Costco’s bar has at least been moving in the right direction — even if  just by pennies.

That will only translate to earnings growth of 5% in the current quarter, though — part of the reason I said solid, not stellar. Plus, despite its decent track record and today’s jump, it’s still lagging the broader market over the past 12 months.

Over the next five years, analysts expect the company to post annual growth over 13%. The good news: That’s better than the sub-12% annual growth that translated to sold 13% annual gains over the past five years. But while that kind of climb — and consistency — is nothing to sneeze at, it also might not be enough to justify the current price tag that’s 22 times next year’s earnings estimates.

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Target (NYSE:TGT)Year-to-Date Gains: 23%

The market’s recent spike has also sent discounter Target (TGT[7]) to all-time highs, despite the fact that 2013 has hardly been the year of red and white — at least on the earnings front.

The first three months of 2013 represented Target’s first drop in revenue in an eye-popping 14 quarters, thanks in part to a slide in same-store sales during the period. The result: The company’s Q1 earnings of 77 cents per share were not only a dime short of its own expectations, but 35% lower year-over-year. One factor that got blamed: bad weather.

Even warming summer months aren’t expected to heat up the company’s numbers, though. Earnings are supposed to fall again not just this quarter, but for the full-year — a recently realized possibility that would break a half-decade streak of full-year growth.

Just three months ago, analysts expected adjusted earnings of $4.57 per share — which would have been a year-over-year gain. Now, they are hoping for a mere $4.36 — a two-cent fall.

Things are expected to get back on track and then some next year, though — possibly part of the reason investors just keep bidding the stock higher. Earnings for the fiscal year ending in January 2015 are expected to improve by 25%, while that should level out to annualized growth of 11% over the next five years.

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Walmart (NYSE:WMT)Year-to-Date Gains: 14%

While Walmart’s face-off with D.C. — and the resulting cancellation of three new stores (pending a veto by the District’s mayor) — may seem insignificant considering the company’s huge footprint, it’s part of a larger problem for retailer. Walmart has more than 10,000 stores in the U.S. and overseas, but it’s struggling to keep growing.

In fact, urban areas — like the District — represent some of Walmart’s last chances for expansion stateside. And the living-wage bill, as Daniel Gross aptly puts it in The Daily Beast[8], is “just the latest example of Walmart’s trouble penetrating the urban territory it needs to conquer.”

Without conquering that territory, Walmart is nothing more than a sleepy giant — as evident in its projected earnings growth of just 6% this year, and average growth of 9% for the next five. And while it managed to grow sales in the most recent quarter — unlike Target and despite many of the same headwinds — its meager 1.1% growth was less than analysts had been expecting.

No wonder the stock’s been lagging the broader market this year, with 13% gains so far in 2013 and only a 7% improvement over the past 12 months.

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Sears Holdings

Sears Holdings (NASDAQ:SHLD)Year-to-Date Gains: 10%

Of course, instead of wallowing in self-pity, Walmart should remember that things could always be worse. Just ask Sears Holdings (SHLD[9]). The stock’s year-to-date gains may be approaching the double-digits, but the past three months have seen a slide of 13%, and the last year tallies a total loss nearing 20%.

Of course, Sears’ struggles are hardly news and hardly going away, even in the face of asset spin-offs[10] and Eddie Lampert at the helm[11]. The stock shed more than 13% in after-hours trading alone back in May after the company posted a loss[12] that was four times larger year-over-year and more than twice the damage analysts had been expecting.

Plus, its sales have been on a downward trend for more than 20 quarters, while it’s posted full-year losses the past three years, is expected to post another one this year … and slated for yet another one the year after that.

While big-box retail is alive and well, Sears is basically dead — and, according to InvestorPlace contributor Will Ashworth[13], would probably be better off put out of its misery considering the value of its real estate.

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J.C. Penney (NYSE:JCP)Year-to-Date Gains: -12%

Another stock whose struggles are more than well-documented? JCPenney (JCP[14]).

First, former Apple (AAPL[15]) genius Ron Johnson was expected to turn the department store around just over a year ago. As you likely remember, he proceeded to eliminate sales and, in the process, alienate customers. He later brought discounts back, but the damage was done. The company’s revenue plummeted and its profits followed.

Of course, Ron Johnson was given the boot earlier this year — the opposite headline-generating move, but one that was hoped to have a similar effect: turn the company around.

Unfortunately, JCP released its first post-Ron earnings back in May … and things were still downright ugly. The company more than doubled its loss year-over-year — sitting $1.58 per share in the red vs. expectations of a $1.04-per-share loss — while revenue dropped more than 16% and same-store sales slid 17%.

The company has consistently missed expectations by a wide mark in recent quarters, while the expectations for just how bad the full-year bleeding will be have (unsurprisingly) been getting worse. Things are expected to get slightly better the year after — with revenue slated to grow and the loss slated to be narrowed significantly — but “better” is a relative term … and JCP still has a long way to go.

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Macys Logo

Year-to-Date Gains: 27%

Not all department stores are in dire straits, though. In fact, moving to Macy’s (M[16]), we have our best-performing stock on the docket. Macy’s is sitting around multiyear highs thanks to a year-to-date climb of 26% — around 10 percentage points better than the broader bull market — and one-year explosion of 50%.

Of course, Macy’s can probably thank JCPenney at least a little for its recent success. The company improved earnings and sales in the first quarter, in part thanks to the fact that it snatched up business from rival chains.

Then again, the slightly-higher-end shopping destination has been chugging along for some time. It’s beaten analyst earnings expectations for the past four quarters, while revenue and non-adjusted earnings are each on at least a a 13-quarter growth streak.

Plus, out of all the big boys on this list, Macy’s also has the biggest earnings growth on tap. The 14% annualized EPS gain on tap for the next five years is hardly huge — and nothing compared to the 45% annual earnings improvement of the last five years — but its better than most established behemoth brands can say.

And hardly bad considering that, even after its stellar outperformance, Macy’s is still priced at just 11 times forward earnings.

As of this writing, Alyssa Oursler did not own a position in any of the aforementioned securities.

  1. [Image]: https://investorplace.com/wp-content/uploads/2013/07/retailshopping185.jpg
  2. COST: http://studio-5.financialcontent.com/investplace/quote?Symbol=COST
  3. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  4. Compare Brokers: https://investorplace.com/options-trading/broker-center/
  5. more money from membership fees: https://investorplace.com/2013/06/forget-walmart-and-target-costco-gets-it/
  6. full-year expectations slowly pared over the last few months: https://investorplace.com/2013/06/will-retail-stocks-keep-outperforming/
  7. TGT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TGT
  8. aptly puts it in The Daily Beast: http://www.thedailybeast.com/articles/2013/07/11/walmart-s-anti-union-wage-plans-earn-a-cold-shoulder-from-big-cities.html
  9. SHLD: http://studio-5.financialcontent.com/investplace/quote?Symbol=SHLD
  10. asset spin-offs: https://investorplace.com/2013/06/sears-hometown-the-spinoff-winner-shld-shos-lwo-hd-osh/
  11. Eddie Lampert at the helm: https://investorplace.com/2013/05/3-things-sears-eddie-lampert-doesnt-get-about-retail/
  12. the company posted a loss: http://www.cnbc.com/id/100755324
  13. according to InvestorPlace contributor Will Ashworth: https://investorplace.com/2012/11/how-sears-is-worth-more-dead/
  14. JCP: http://studio-5.financialcontent.com/investplace/quote?Symbol=JCP
  15. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  16. M: http://studio-5.financialcontent.com/investplace/quote?Symbol=M

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