All Eyes on Wal-Mart As Retailers Report Q1 Results This Week
Analysts have been boosting their outlook for earnings at the retail industry’s 800-pound gorilla, Wal-Mart Stores, Inc. (WMT.N), in recent weeks. That represents some much-needed good news for the company as it continues to grapple with the fallout from media reports late last month that its Mexican division resorted to bribery in order to make its growth more impressive. This Thursday, when Wal-Mart reports the actual results for its first quarter (which wrapped up April 30), investors and the market will have the opportunity to see whether those forecasts were correct, and to take a closer look at the company’s fundamentals.
For Wal-Mart, those fundamentals appear to be at an inflection point. On one hand, the bribery controversy has dented not only the company’s stock price but also its public image. As a result, at today’s share price of around $59, the StarMine Intrinsic Value model suggests that Wal-Mart stock is dramatically undervalued and that, based only on its fundamentals, that it should be trading at closer to $80 a share. (That valuation assumes a forward 10-year compound annual earnings growth rate of 7.3%.) The consensus earnings forecast calls for the retail giant to report earnings of $1.04 a share, up from 98 cents in the first quarter of 2011. However, one highly rated analyst expects Wal-Mart to report earnings of $1.07 a share.
While Wal-Mart’s U.S. division has posted two quarters of modest gains in same-store sales, those have come after nine straight quarters of declines. Not surprisingly, therefore, the retailer is hoping that it will get a big boost in both sales and profits by expanding the range of products from Apple Inc. (AAPL.OQ) as well as the space they devote to their display; the company has added an Apple “store-within-a-store,” which will sell Apple accessories. The hope is that as consumers are drawn into the store by the Apple products, they will increase their spending in other departments, driving total sales higher.
Wal-Mart’s archrival, Target Corp. (TGT.N) also is expanding the array of Apple merchandise available to its shoppers, with a similar objective in mind. Target’s plans include selling the Apple TV device, which streams videos and music, and expanding its display area to enable consumers to interact with Apple products. This intensified emphasis on Apple products comes at the same time as Target begins the process of removing Kindle e-book readers, made by Amazon (AMZN.OQ), from its stores. Target also will be counting on Apple to boost its same-store sales: over the past year, its quarterly same-store sales have fallen short of forecasts by analysts polled by Thomson Reuters twice running.
Target and Wal-Mart are just two of the 13 retailers in the Thomson Reuters Same Store Sales Index scheduled to report their earnings this week. The first major release will be that of TJX Companies, Inc. (TJX.N), due out before the market opens tomorrow morning; Target will report on Wednesday morning, before the market opens, while investors expect Wal-Mart’s results on Thursday. Thomson Reuters expects that all 82 retailers in the index will post, collectively, a gain of 3.0% in same-store sales for the first quarter of 2012, higher than the 1.1% advance recorded in the first quarter of last year. Excluding Wal-Mart, the SSS growth rate appears likely to jump to 3.7%, double the 1.8% SSS gain (ex-Wal-Mart) in the first quarter of 2011.
The discounters appear likely to lead the way, analysts polled by Thomson Reuters suggest. This group may see a 3.1% jump in same-store sales, or one as high as 6% once Wal-Mart’s results are excluded from the mix. This likely outperformance by the Discount sector (excluding Wal-Mart) is impressive, especially when compared with the more robust 4.5% advance in same-store sales recorded in the first quarter of 2011. Analysts expect Wal-Mart to report same-store sales that are 1.8% ahead of last year’s levels, following a 0.3% decline reported in the first quarter of 2011. Target already has reported its first-quarter same-store sales were 5.3% higher than those of a year ago, a gain that compares favorably to the 2% increase in same-store sales it announced for the first quarter of 2011.
Analysts expect that Target also will report higher earnings for the first quarter, with forecasts calling for the retailer to announce profits of $1.01 a share, up from 99 cents a share in the first quarter of 2011. Wal-Mart also should post much healthier same-store sales and earnings gains in the first quarter it than a year-ago, thanks to its recent successes in winning market share in its food sales division. Analysts expect Wal-Mart to have benefitted from strong growth in its international division, cost savings from improved global sourcing, and opportunity to increase the number of shoppers in its aisles, as well as sales performance in its U.S.-based stores.
Still, analysts don’t expect all retailers to report robust first-quarter results. For instance, those analysts polled by StarMine believe JC Penney (JCP.N) is very likely to report a loss of 10 cents a share for the first quarter, a significant decline from the 30 cents a share the company earned in the year-ago first quarter. The firm has been suffering the impact from poor product selection that has left stores lumbered with too much off-trend inventory, which is hurting sales. Moreover, the company has lost market share to Macy’s, which has done a better job of offering consumers on-trend merchandise, and that as a result has seen strong increases in same-store sales that JC Penney can only envy. Indeed, JC Penney has the weakest same-store sales growth estimate in our retail universe, with analysts projecting that its same-store sales will report an outsize decline of 12.2% during the first quarter (ending April 30.)
Earlier this year, JC Penney’s new CEO announced a new pricing strategy, aimed at boosting the company’s profits. But the initiative seems to have backfired, alienating some of the retailer’s loyal shoppers, who have long based purchase decisions around the company’s discounted offerings and coupons. Introducing more upscale merchandise may mean that the company ends up losing more of its core clientele. Moreover, analysts believe it will take time for the company to remodel its stores, refine its product offering and convince consumers to accept its new business strategy, all of which will weigh on the company’s results. Nonetheless, when it reports its earnings on Thursday, analysts hope JC Penney will be in a position to announce the introduction of a range of buzz-worthy brands into its stores of the kind that will generate some excitement and interest among shoppers. (Again, the ability to launch appealing new brands into stores is something that has been a boon to Macy’s.)
While JC Penney may be struggling, there are several retailers that have demonstrated their ability to generate strong, steady same stores sales growth over the past five years. This group includes several companies that are expected to report impressive gains in same-store sales for the first quarter, such as off-price retailers, TJX Companies, Inc. (TJX.N), and Ross Stores, Inc. (ROST.OQ). These two companies already have announced some of the strongest same-store sales results in the sector, with gains of 8.0% and 9.0%, respectively. Now it’s time for them to report their quarterly results, and analysts polled by Thomson Reuters expect both to report higher earnings for the just-ended quarter. They anticipate that TJX Companies will report it earned 54 cents a share for the quarter, while Ross Stores will announce that its profits rose to 93 cents a share.
Both retailers specialize in selling designer clothing at discounted price and were among the strongest performers within the retail sector throughout the recession and the economic slowdown. They took advantage of those tough economic times to build customer loyalty that still endures today, and that translates into strong gains in same-store sales. As a result, analysts polled by Thomson Reuters expect the just-ended first quarter of 2012 to be just the first of what seems likely to become four consecutive quarters of earnings growth for both these retailers.
For more on analysts’ changing views of Retail Earnings and Sales, please watch this interview with analyst Jharonne Martis.