Wal-Mart Stores Inc, the world’s biggest retailer, may be poised for share gains exceeding 10 per cent for a second straight year as discounts on groceries and flat-panel televisions grab customers from Target Corp.
The chain’s stock, which dropped in five of the past nine years, will probably advance 12 per cent this year, following the 18 per cent growth to $56.06 that made it the best performer on 30-member Dow Jones Industrial Average in 2008, according to analysts’ estimates compiled by Bloomberg.
“After several years of famine, we’re looking for a few years of feast,” said John McMillin, a Jersey City, New Jersey- based analyst at Lord, Abbett & Co, which owned 15.2 million Wal-Mart shares through September among $70 billion in assets. “Wal-Mart is more than a one-year story.”
While the US recession deepened last year, Wal-Mart climbed the most since 1999 as it started to sell $4 medicines and reduced prices on groceries, jeans and other basics to attract more US customers. The company is extending discounts on laundry detergent, vacuum cleaners and fresh foods into 2009, and adding products such as Apple Inc’s Web-surfing iPhone.
Wal-Mart added $1.12, or 2 per cent, to $57.18 at 4:01 pm in New York Stock Exchange composite trading.
Target, the second-largest US discount chain, doesn’t sell the iPhone or generate as much profit as Wal-Mart from groceries, toilet paper and other necessities that consumers continue to buy as unemployment rises and house foreclosures increase. Clothing and home fashions, two categories hurt by the spending slowdown, accounted for 41 per cent of Target’s revenue in the year through February 2, compared with 18 per cent at Wal-Mart.
The Bentonville, Arkansas-based retailer said traffic to its stores increased in the quarter through October 31, while Target had fewer shoppers. Sales by outlets open at least a year rose 2.7 per cent at Wal-Mart’s US stores and fell 3.3 per cent at Target.
Wal-Mart will report sales growth for the next three quarters, while Target’s revenue will decline or remain little changed, according to analysts’ estimates.
“I think things get worse for Target given its strength in discretionary items and its lack of a powerful price image,” said Howard Davidowitz, chairman of retail consulting and investment-banking firm Davidowitz & Associates Inc. in New York.
Target, based in Minneapolis, and Wal-Mart both gained US market share in 2008, said Eric Hausman, a Target spokesman.
“It is not a simple zero-sum game between the two companies,” Hausman said on Friday. He didn’t provide a 2009 forecast for market share.
The two discounters have won shoppers from US grocery and drugstore chains, Uta Werner, a Sanford C. Bernstein & Co analyst in New York, said in a December 18 note to clients. She rates Target “outperform” and Wal-Mart “market perform.”
Target’s concentration in apparel and home items means it will “gain considerably more from the surge in discretionary spending than Wal-Mart” when the economy rebounds, she said.
Mike Duke, formerly head of Wal-Mart’s overseas units, takes over as chief executive officer February 1 from H. Lee Scott, under whose nine-year tenure the company’s shares lost 16 per cent. Following three years of declines, the stock rose 2.9 per cent in 2007 as store renovations, merchandising improvements and price cuts helped boost sales.
Duke aims to further spur growth with apparel, home furnishings and overseas expansion, including plans to buy Chile’s largest grocery chain, Distribucion y Servicio D&S SA.
“For the first half of 2009, people are still going to be focused on value, and that’s Wal-Mart’s prime thing,” said Janna Sampson, co-chief investment officer at Oakbrook Investments LLC in Lisle, Illinois. “It’s a solid stock that’s going to deliver for the long run.”
Wal-Mart will probably lose its position as the Dow’s strongest gainer to banks if the financial crisis eases, said Sampson.
“One of those really beaten-down finance stocks could easily go up 30, 40 or 50 per cent and Wal-Mart isn’t going to do that,” she said. Oakbrook manages $1.1 billion in assets, including 445,610 Wal-Mart shares.
Wal-Mart Chief Financial Officer Thomas Schoewe won’t speculate on how its shares may perform next year, said John Simley, a company spokesman.
The retailer will probably slide to rank 18th in the index, according to analysts’ estimates. Bank of America Corp, the biggest US retail bank, and Citigroup Inc, which received $65 billion from the US government to help rebuild its balance sheet, may climb 55 per cent and 42 per cent, respectively.
Twenty analysts tracked by Bloomberg recommend buying Wal- Mart shares and one says “sell.” Six analysts have a “hold” rating on the stock.
Sales at stores open at least a year will probably continue to advance as it improves its offering and marketing of clothes and home furnishings, said Lauri Brunner, a Minneapolis-based analyst at Thrivent Asset Management. Among $67 billion in assets, the firm held 2.3 million Wal-Mart shares through Sept. 30 after adding 734,258 shares in the previous three months.
In November, Wal-Mart said earnings would grow more slowly than it had expected in the year through January as a stronger dollar erodes overseas revenue. Its lure for consumers grappling with tighter budgets is still helping its stock defy investors who bet against it.
Hodges Capital Management Inc.’s $330 million Hodges Fund sold its 150,000 shares in the retailer in October and bought AMR Corp., Continental Airlines Inc., Exxon Mobil Corp. and Terax Energy Inc. in anticipation an economic rebound would bolster their shares more than Wal-Mart’s.
“Looking back, I’d be very comfortable owning it right now,” Donald Hodges, chairman of Hodges Capital in Dallas, said of Wal-Mart.
