In this edition of PLMALive! Roy White profiles the strongest retail players this year after the stock market’s latest plunge.
Retailing is a tough industry. Margins are narrow. Competition is fierce. Quick changes in consumer preferences can be fatal. But many merchants thrive in this demanding environment, and, as a result, many mass market retailing stocks can perform with or better than the overall market.
Wall Street has been edgy this year. A stumbling Chinese economy and a sharp drop in the Chinese stock market prompted a correction in mid-August at the New York Stock Exchange and NASDAQ, and the Dow Jones Industrial Average plummeted by 1,879 points – nearly 11% — in a week. The markets subsequently recovered – over 600 points as of the beginning of October or 4% higher than the mid-August low and 7% beneath the level just before the mid-August correction.
Retail stocks fully participated in the correction. The Dow Jones U.S. Retail Index dropped 83 points – or nearly 10% — in mid-August, about the same as the decline of the stock market as a whole. And, their recovery has matched that of the market with the retail index rising as of the beginning of October by 24 points or a little better than 4% from the mid-August low.
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Several mass-market retailers, among others, were leaders in this resurgence, and the performance of their stocks can in large part be attributed to their operation excellence.
Take Kroger, for example.
At the mid-August correction, its stock dropped along with almost every other stock of the market. It bottomed out a week later, down about 12.5%, and has since recovered to where it is around 9% above the mid-August low. That’s better than the overall market performance. There are reasons for this. The Cincinnati chain’s operating stats are superlative. Identical store sales are up 5.3% in the second quarter. Total sales excluding fuel gained 5.7%. Gross margins widened by over a point to 21.8%. A powerful corporate brands program grew to 26.4% of units sold and 25.1% of sales dollars. As a result, the net income of this chain soared 24% and earnings per share increased 27% to $1.08. On the basis of these profit gains, chain management increased 2015 guidance to $1.98 from a $1.92 – a 3% increase.
Warehouse club operator Costco, too, has performed well in the stock market. Its stock dipped 9% with the mid-August correction, by the beginning of October it had risen 9% from the August low, more than double the overall stock’s recovery. And, here too, operational performance has been a key factor in the stock’s strong recovery. In the fiscal year ended August, earnings per share increased 15% to $5.37. Comp store sales excluding fuel soared 7% for the year. Membership fees rose over 4%. The net-to-sales ratio widened to over 2% from 1.8%.
Target, now recovering from the data breach and closure of the Canadian operation, may well be a new darling of Wall Street. The stock dropped 7-8% in mid-August but has recovered a good 6% from the mid-August low and is right back up where it was before the August correction. The reason: Target’s first half numbers apparently encouraged investors, as indeed they should have. A much improved 2.4% comp store sales gain was prompted by a 1.3% increase in the number of transactions, a 1.1% gain in transaction size and a 4.5% increase in average selling price. Digital sales increased by 37%. The result was a 47% gain in earnings per share to $2.23
Retailers have to work hard and smart to generate high-level stats, but when they do, investors are more than willing to reward them with rising stock prices and substantial valuation, just as they did with these merchants that demonstrated their ability to generate comp store growth and solid profit margins.