RETAIL STOCK UPDATE:
08:23am EDT 17-Jul-97 DLJ Securities (Gary Balter) GNCI WMT LOW KM HD DH COST
DLJ ****** DONALDSON, LUFKIN & JENRETTE ****** DLJ
July 17, 1997 Gary Balter (212) 892-4228
Doug Donovan (212) 892-8906
RETAIL STOCK UPDATE
VIEWPOINT
o Retail Sales On Plan First Two Weeks Of July. Heat Helping
Seasonal Goods
o Wal-Mart# Using Savings To Expand Price Gap With Kmart
o Lowe's# Sales Improving, However, Internal Issues Are A Concern
o GNCI+*, sales are running very strong and now expect an upside
surprise this quarter in comps.
Retail sales for the first 10 days of the July retail calendar are on
or slightly above plan. The strongest areas, not surprising, are
seasonal goods, reflecting the heat wave and retailers efforts to
clean their inventories before the introduction of fall goods. That
includes air conditioners, automotive, and lawn and garden. More
important, as we wrote last week, we are very optimistic on the
outlook for most retailers second quarter results, most of whom will
report in mid August. The optimism reflects tighter inventory levels,
less markdowns, good expense controls and a focus on the bottom line
that was missing in past years. In particular, we expect the best
earnings results to be reported by Home Depot#, Dayton Hudson#,
General Nutrition+*, Wal-Mart#, Costco+*++@, Consolidated
Stores, CompUSA#, and Borders+#. We continue to expect retail stocks
to outperform the market.
Company Comments
o Wal-Mart, Dayton Hudson and Kmart
We continue to view Dayton Hudson as the most attractive discount
store operator, with excellent potential to continue to beat the
earnings estimates, solid growth prospects and cheap relative
valuation. We also expect Wal-Mart stock to continue to perform
well in this market environment. Importantly, we are noticing that
both Wal-Mart and Target, through their tight expense and inventory
management, are selectively lowering prices. Between the two of them,
it is having no impact, and the price reductions are nothing like in
past years. However, Kmart's problems are preventing it from matching
these price cuts, which is widening the price gap between Kmart and
its competitors. Although all three are on plan this month in sales,
Kmart's have a higher component of clearance. The widening price gap,
in our opinion, will make it that much more difficult for Kmart as it
continues its recovery efforts. We continue to rate Dayton Hudson a
Buy, and view Wal-Mart as a safe and attractive stock in this
environment. |
