Supply chain bottlenecks, rising inflation and labor shortages are weighing on retailers. This has also been reflected in retailer stock prices, as shares of wholesalers like Walmart, Costco and BJ’s Wholesale Club Holdings have fallen 15.5%, 11% and 9.2% respectively over the past month.
These disorders lead to a pile-up of stocks. According to a Bloomberg article from last week, citing its own data, large retailers listed on the S&P Consumer Index with a market value of over $1 billion like Walmart and Gap (GPS) are accumulating $44.8 billion in inventory, a 26% year-over-year increase.
However, consumer spending shows no signs of slowing down so far. According to the National Retail Federation (NRF), citing data from the US Census Bureau, retail sales in April rose 0.9% from March, on an adjusted basis, and rose 6.4% from year-over-year, unadjusted.
In this scenario, is it attractive for traders to replenish inventory and will retail spending continue to be on an upward trajectory?
Using the stock comparison tool TipRanks, let’s compare three such wholesalers, Walmart, Costco, and BJ’s Wholesale Club Holdings. We’ll also look at what Wall Street analysts are saying about these stocks.
Walmart’s business comprises three business segments, including Walmart US, Sam’s Club and Walmart International.
The retailer released first quarter results that disappointed investors. Specifically, when it comes to WMT’s net income, its operating profit was $5.3 billion in the first quarter, down 23% year-over-year.
Expanding on this further, the company’s management said on its first-quarter earnings call that higher payroll expenses and an increase in general merchandise inventory, particularly at Walmart US, weighed on its earnings. operation. According to the company, inventories rose 32%, which is higher than its own estimate.
Another factor that affected operating profits was rising fuel costs. C. Douglas McMillan, president, CEO and director of Walmart, pointed out during his first quarter earnings call that “Fuel was $160 million higher in the quarter in the United States than what we had planned. We made progress adjusting pricing to rising costs as the quarter progressed, and while we expect some gross margin pressure in the second quarter, we expect improvement from the first quarter. »
McMillian pointed out that the above three factors each accounted for 33% of WMT’s overall shortfall.
WMT expects these inflationary cost pressures in the U.S. to “extend a bit into the second quarter, but planning costs have been mitigated.”
Even RBC Capital analyst Steven Shemesh believes that “the company’s margins will be unstable in the short term as inflationary pressures have impacted the entire supply chain.” However, the analyst believes “Walmart’s size and scale make it one of the best positioned in the space to mitigate these impacts.”
Shemesh is also optimistic that WMT’s “new initiatives such as Walmart Connect and Marketplace could shift margins down the road.”
As a result, the analyst remains bullish on the stock with a buy rating, but cut the price target to $153 from $160 for the stock. Shemesh’s price target still implies 19.1% upside potential at current levels.
Other Wall Street analysts echo Shemesh and are similarly bullish with a strong buy consensus rating based on 22 buys and five holds. WMT’s average price target is $157.11, implying a potential upside of 22.3% from current levels.
Costco, the wholesaler, reported strong third-quarter results. However, rising fuel prices continued to weigh on Costco’s gross margins in the fiscal third quarter, which fell 99 basis points to 10.2% from 11.2% a year ago.
But there was a silver lining to that, as the retailer’s selling, general and administrative (SG&A) expenses fell to 8.62% of sales, from 9.46% in the same period a year ago, excluding impact of fuel inflation.
Additionally, Costco’s membership renewal was at an all-time high at the end of the third quarter with a renewal rate of 92.3%, particularly in the United States and Canada. Membership fees increased 9.2% year over year to $984 million in the third quarter of the fiscal year.
Given strong third-quarter sales and a “comfortable inventory position” in addition to other positives for the stocks listed above, Baird analyst Peter Benedict remains bullish on COST.
The analyst commented, “Net, COST continues to take share by providing members with tremendous value on high-quality merchandise – a proven strategy that only becomes more relevant during times of high inflation.”
Benedict, however, lowered the price target to $560 from $600 on the stock, implying 18.9% upside potential at current levels.
The rest of the street analysts are also bullish with a strong buy consensus rating based on 16 buys and four holds. The average COST price target is $583.95, implying a potential upside of 24.04% from current levels.
BJ’s Wholesale Club Holdings (NYSE:BJ)
BJ’s operates membership warehouse clubs and currently has 229 clubs and 159 BJ’s Gas locations in 17 eastern United States. The company is headquartered in Westborough, Massachusetts.
BJ’s delivered impressive first quarter results despite the effects of inflation and supply chain issues.
Deutsche Bank analyst Krisztina Katai was particularly impressed with BJ’s commodity margin which increased 50 basis points on a two-year basis. Even BJ’s comparable general merchandise and services sales were up 22% on a two-year, year-to-date basis, while they were down 10% year-over-year in the first quarter.
Additionally, the analyst believes BJ should benefit “from its gas stations in the near term given high gas prices and an increasingly value-oriented consumer, which should support the MFI [membership fee income] growth for the rest of the year.
While Katai was mildly concerned about BJ’s higher inventory levels, particularly in general merchandise, the analyst did not perceive a higher risk of markdowns at these inventory levels.
The analyst praised management for “strong execution given product cost, supply chain and wage pressures, and believes BJ is well positioned for the future given what appears to be earnings of persistent market share and a compelling value proposition in an inflationary environment”.
Katai remains bullish on the stock with a Buy rating and price target of $74, implying upside potential of 26.2% at current levels.
However, other analysts on the street are cautiously bullish on the stock with a moderate buy consensus rating based on 11 buys, six holds and one sell. BJ’s average price target is $69.25, implying an upside potential of 18.1% from current levels.
As multiple macroeconomic headwinds such as inflation, supply chain lockdowns, and labor shortages continue to rage, these three wholesale retailers appear to be successfully navigating this scenario.
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