RETAIL STOCK OUTLOOK: July Sales Are Generally In Line; Earnings Out
09:08am EDT 8-Aug-97 DLJ Securities (Gary Balter)
DLJ ****** DONALDSON, LUFKIN & JENRETTE ****** DLJ
August 8, 1997 Gary Balter (212) 892-4228
Doug Donovan (212) 892-8906
Jeff McMahon (212) 892-2351
RETAIL STOCK OUTLOOK
July Sales Are Generally In Line;
Earnings Outlook For Retailers Is Still Better Than For Market
(Part 1 of 8)
VIEWPOINT
o July sales generally in line with expectations
o Good weather and the Olympics comparison, has been a positive for
sales, especially for seasonal goods including air conditioners and
fans.
o Retail stocks, with improving sales, lessening competition,
strong year over year Q2 earnings, and easy earnings comparisons for
the rest of year should continue to outperform.
o Best near term stocks:Corporate Express^cexp, CompUSA#, Dayton
Hudson#, Home Depot#, O'Reilly Automotive*+, Guitar Center*+
o Best longer term stocks: Stocks listed above plus Sears#, Office
Supply retailers, Viking*
o Most Undervalued Stocks Waiting For Segment Consolidation:
Circuit City#, AutoZone+
Retail sales were generally in line with expectations, with few
surprises. More important, as we are already witnessing with those
companies that have reported, we expect the majority of retailers to
provide upside surprises when they report earnings beginning next
week. Among the likely upside earnings surprises we would include
CompUSA#, Dayton Hudson, Consolidated Stores, Wal-Mart#,
Borders+#.
WAL-MART (WMT: $38 1/16)#
Rating: Market Performance
EPS Estimates 1/97A 1/98E 1/99E P/E 1/98E 1/99E
$1.33 $1.53 $1.71 24.8x 22.2x
Wal-Mart reported same store sales for the month of July up 6.0%.
While the comps are solid, comp levels are much less important for
Wal-Mart than inventory management and gross margins and these
continue to be positive. Inventories may actually be down again in
dollars this quarter. Because WMT is keeping tighter inventories, the
stores look crisper with an overall better presentation which is
translating into better sales. Better sales and tighter inventories
allows Wal-Mart to be more competitive on price without affecting
gross margins.
Managements at both Dayton Hudson and Costco confirmed our belief that
Wal-Mart is not being as aggressive with its pricing as it has
historically. This, in combination with its rationalization of its
expense structure, is leading to better bottom-line results. Wal-Mart
will report second-quarter earnings on August 12 and remains confident
they will meet analyst expectations. Therefore, we continue to view
WMT as a solid core holding for those investors concerned about in
a less certain overall stock market, as it no longer represents the
growth stock it once did, but rather a more consistent performer, with
less downside risk than the faster growing retail companies. It is
most likely on its way to $40.
July is typically a mediocre month for retailers, however, delayed
warmer weather sparked sales increases in seasonal items which
generated significant overall growth. Due to seasonal improvements,
same store sales increased 7.6% at the discount stores and 1% at
Sam's. Overall sales, up 11.3% from the similar period last year, were
sparked by increases in seasonal items such as air-conditioners and
fans due to normalized climate conditions. Discount store sales
posted significant gains during the first three weeks of the month due
to strong growth in seasonal items while sales in electronics, toys,
pet supplies, domestics, horticulture and apparel also improved.
Sam's Club came in on the low end of expectations despite a strong
third week and improved performance in categories such as apparel,
toys, luggage and seasonal foods. Membership renewals remain robust
while sales in the Southeast and West continue to post the highest
comps.
Internationally, Canada achieved double digit sales increases of 20%
while Puerto Rico and Mexico continued to post impressive results
primarily due to improved Club performance. |
