Supply chain bottlenecks, higher inflation, and labor shortages are taking a toll on retailers. This has also been reflected in the stock prices of discount retailers like Walmart, Costco, and BJ’s Wholesale Club Holdings which have tanked 15.5%, 11%, and 9.2% in the past month, respectively.
These troubles are leading to a pile-up of inventories. According to a Bloomberg article from last week, citing its own data, major retailers listed on the S&P consumer index with a market value of more than $1 billion like Walmart and Gap (GPS) are amassing $44.8 billion in inventories, an increase of 26% year-over-year.
However, consumer spending so far is showing no signs of slowing down. According to the National Retail Federation (NRF), citing data from the U.S. Census Bureau, retail sales in April were up 0.9% from March, on an adjusted basis, and increased 6.4% year-over-year, unadjusted.
In this scenario, is it worthwhile for retailers to build up their inventories, and will retail spending continue to be on an upward trajectory?
Using the TipRanks stock comparison tool, let us compare three such discount retailers, Walmart, Costco, and BJ’s Wholesale Club Holdings. We will also look at what Wall Street analysts are saying about these stocks.
Walmart (NYSE: WMT)
Walmart’s business comprises three business segments including Walmart U.S., Sam’s Club, and Walmart International.
The retailer posted Q1 results that left investors disappointed. Specifically, when it comes to WMT’s bottom line, its operating income was $5.3 billion in Q1, a drop of 23% year-over-year.
Elaborating further on this, the company’s management stated on its Q1 earnings call that higher wage expenses and an increase in general merchandise inventories, particularly at Walmart U.S., dragged down its operating profits. According to the company, inventories are up 32%, higher than its own estimate.
Another factor that affected operating profits was a rise in fuel costs. C. Douglas McMillan, President, CEO, and Director, Walmart pointed out on its Q1 earnings call that “Fuel ran over $160 million higher for the quarter in the US than we forecasted. We made progress matching pricing to the increased costs as the quarter progressed, and while we expect some gross margin pressure in Q2, we expect an improvement over Q1.”
McMillian pointed out that the above three factors represented 33% each of WMT’s overall miss in profits.
WMT expects that these inflationary cost pressures in the United States will “stretch some into Q2, but the scheduling-related costs have been mitigated.”
Even RBC Capital analyst Steven Shemesh believes that the company’s “margins will be choppy near-term as inflationary pressures have impacted the entire supply chain.” However, the analyst thinks that “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 like Walmart Connect and Marketplace could move the needle on margins down the road.”
As a result, the analyst remains upbeat about the stock with a Buy rating but reduced the price target to $153 from $160 on the stock. Shemesh’s price target still implies an upside potential of 19.1% at current levels.
Other Wall Street analysts echo Shemesh and are also bullish with a Strong Buy consensus rating based on 22 Buys and five Holds. The average WMT price target is $157.11, which implies a 22.3% upside potential to current levels.
Costco (NASDAQ: COST)
Costco, another discount retailer, reported strong Q3 results. However, higher fuel prices continued to weigh on Costco’s gross margins in fiscal Q3, which declined 99 basis points to 10.2% from 11.2% in the year-ago period.
But there was a silver lining to this as the retailer’s selling, general and administrative costs (SG&A) came in lower at 8.62% of sales, versus 9.46% in the same period a year ago, excluding the impact of fuel inflation.
Moreover, Costco’s membership renewal was at an all-time high at the end of Q3 with a renewal rate of 92.3%, particularly in U.S. and Canada. Membership fees went up 9.2% year-over-year to $984 million in fiscal Q3.
Considering the strong sales in Q3 and a “comfortable inventory position” besides other positives for the stock listed above, Baird analyst Peter Benedict remains optimistic about COST.
The analyst commented, “Net, COST continues to take share by providing members tremendous value on high-quality merchandise -a proven strategy that only increases in relevance during periods of elevated inflation.”
Benedict, however, lowered the price target to $560 from $600 on the stock, implying an upside potential of 18.9% at current levels.
The rest of the analysts on the Street are also optimistic with a Strong Buy consensus rating based on 16 Buys and four Holds. The average COST price target is $583.95, which implies a 24.04% upside potential to 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 states in the Eastern United States. The company has its headquarters in Westborough, Massachusetts.
BJ’s delivered impressive Q1 results despite the effects of inflation and supply chain issues.
Deutsche Bank analyst Krisztina Katai was particularly impressed by BJ’s merchandise margin that increased by 50 basis points on a two-year basis. Even BJ’s general merchandise and services comparable sales were up 22% on a two-year stacked basis, while down 10% year-over-year in Q1.
Moreover, the analyst is of the view that BJ is likely to benefit “from its fuel stations in the near term given elevated gas prices and an increasingly value-focused consumer, which should sustain MFI [membership fee income] growth for the balance of the year.”
While Katai was slightly concerned regarding BJ’s higher inventory levels, particularly when it comes to general merchandise, the analyst did not perceive a higher risk of markdowns to these inventory levels.
The analyst commended the management for “the solid execution given product cost, supply chain, and wage pressures, and believe BJ is well-positioned going forward given what appear to be sticky market share gains and a compelling value proposition amid an inflationary backdrop.”
Katai remains bullish on the stock with a Buy rating and a price target of $74, implying an upside potential of 26.2% at current levels.
However, other analysts on the Street are cautiously optimistic about the stock with a Moderate Buy consensus rating based on 11 Buys, six Holds, and one Sell. The average BJ price target is $69.25, which implies an 18.1% upside potential to current levels.
Bottom Line
As multiple macroeconomic headwinds such as inflation, supply chain logjams, and labor shortages continue to rage on, these three discount retailers seem to be sailing successfully through this scenario.
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