Consistent consumer spending, changing consumer preferences, the growth of online shopping, the adoption of newer technologies, and easing inflation are expected to bolster the big box retail industry’s growth prospects.
Amid this backdrop, it could be prudent to buy fundamentally strong big box retailers Target Corporation (TGT), Walmart Inc. (WMT), and The Kroger Co. (KR).
Before digging into the fundamentals of these stocks, let’s discuss why the big-box retail industry is well-positioned for growth.
With interest rates at a 22-year high, retail spending took a hit as retail sales fell 0.1% sequentially but rose 2.5% year-over-year to $705 billion in October. The sequential decline in retail sales was smaller than what economists had expected. Total sales from August 2023 through October 2023 were up 3.1%.
Although footfall to retail stores was down in October, it is likely to increase during the holiday, with 90% of shoppers surveyed under the ICSC’s 2023 Thanksgiving Weekend Intentions survey planning to visit physical stores to buy or pick up items.
Tom McGee, CEO of ICSC said, “We’re continuing to see consumers gravitate towards physical retail for the holiday purchases, enticed by the prospect of seeing merchandise firsthand, attentive customer service, and the ritual of buying gifts for the holidays.”
The National Retail Federation predicts overall spending during the holiday season will grow between 3% and 4% to reach a total of $957 billion, a new record.
Although inflation rose 3.2% year-over-year in October, it remained flat sequentially. However, both were below Wall Street estimates. Similarly, the unemployment rate was 3.9% in October, marking 21 straight months of the jobless rate remaining below 4%. Additionally, the Fed will likely start cutting rates as early as May next year. All these factors bode well for the big-box retailers as consumer spending will likely remain healthy.
Moreover, big-box retailers now employ emerging technologies, such as artificial intelligence (AI), machine learning (ML), etc., to provide their customers with a seamless and personalized shopping experience. This also helps them gain operational efficiencies, thereby helping reduce costs. They are also harnessing the power of the Internet by offering their products online.
Driven by increasing disposable incomes and changing consumer preferences, the global food and grocery retail market is forecasted to reach $14.78 trillion by 2030, growing at a CAGR of 3%.
In light of these encouraging trends, let’s look at the fundamentals of the three best A-rated Grocery/Big Box Retailers stocks, beginning with number 3.
Stock #3: Target Corporation (TGT)
TGT operates as a general merchandise retailer in the United States. It offers apparel for women, men, boys, girls, toddlers, and infants and newborns, as well as jewelry, accessories, and shoes; and beauty and personal care, baby gear, cleaning, paper products, and pet supplies. It also provides dry grocery, dairy, frozen food, beverages, electronics, furniture, lighting, storage, kitchenware, small appliances, etc.
In terms of the trailing-12-month Return on Common Equity, TGT’s 30.87% is 164.3% higher than the 11.68% industry average. Likewise, its 10.37% trailing-12-month Return on Total Capital is 50.9% higher than the industry average of 6.87%. Furthermore, the stock’s 4.82% trailing-12-month Capex/Sales is 50.5% higher than the industry average of 3.21%.
TGT’s total revenue for the fiscal third quarter ended October 28, 2023, came in at $25.40 billion. Its operating income rose 28.9% year-over-year to $1.32 billion. Its net earnings rose 36.4% over the prior-year quarter to $971 million. In addition, its adjusted EPS increased 45.7% year-over-year to $5.96.
Street expects TGT’s EPS and revenue for the quarter ending January 31, 2024, to increase 26.3% and 1.3% year-over-year to $2.39 and $31.82 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past month, the stock has increased 22.1% to close the last trading session at $133.71.
TGT’s POWR Ratings reflect strong prospects. It has an overall rating of B, which translates to a Buy in our proprietary system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Value and Sentiment. It is ranked #21 out of 38 stocks in the A-rated Grocery/Big Box Retailers industry. To access TGT’s ratings for Growth, Momentum, Stability, and Quality, click here.
Stock #2: Walmart Inc. (WMT)
WMT engages in the operation of retail, wholesale, and other units worldwide. It operates through three segments: Walmart U.S., Walmart International, and Sam’s Club. It operates supercenters, supermarkets, hypermarkets, warehouse clubs; ecommerce websites, and mobile commerce applications. It offers grocery and consumables, alcoholic and nonalcoholic beverages, pet supplies, paper goods, etc.
On November 30, 2023, Sam’s Club, a division of WMT, announced plans to open two new distribution centers outside St. Louis and Minneapolis in early 2024, aiming to enhance its supply chain and improve product availability for members.
This move is part of Sam’s Club's broader strategy to optimize its network capabilities, potentially contributing to increased efficiency and competitiveness within its overall business operations.
In terms of the trailing-12-month Return on Total Assets, WMT’s 6.29% is 30.1% higher than the 4.83% industry average. Likewise, its 10.66% trailing-12-month Return on Total Capital is 55.2% higher than the industry average of 6.87%. Furthermore, the stock’s 2.52x trailing-12-month asset turnover ratio is 201.8% higher than the industry average of 0.84x.
For the third quarter that ended October 31, 2023, WMT’s total revenues increased 5.2% year-over-year to $160.80 billion, while its operating income rose 130.1% over the prior year quarter to $6.20 billion. Its consolidated net income attributable to WMT and net EPS attributable to WMT came in at $453 million and $0.17, compared to a net loss attributable to WMT and a net loss per share of $1.80 billion and $0.66 in the prior-year quarter, respectively.
For the quarter ending January 31, 2024, WMT’s revenue is expected to increase 3.9% year-over-year to $169.09 billion. Its EPS for the quarter ending April 30, 2024, is expected to increase at 8.8% year-over-year to $1.60. It surpassed the Street EPS estimates in each of the trailing four quarters, which is impressive. Over the past nine months, the stock has gained 10.1% to close the last trading session at $154.30.
It’s no surprise that WMT has an overall B rating, equating to a Buy in our proprietary ratings system.
It is ranked #16 in the same industry. It has a B grade for Stability. To see the additional ratings of WMT for Growth, Value, Momentum, Sentiment, and Quality, click here.
Stock #1: The Kroger Co. (KR)
KR operates as a food and drug retailer. The company operates combination food and drug stores, marketplace stores, multi-department stores, and price impact warehouses. The company provides diverse products, including apparel, home fashion and furnishings, electronics, automotive goods, toys, etc.
In terms of the trailing-12-month Return on Common Equity, KR’s 17.96% is 53.8% higher than the 11.68% industry average. Likewise, its 9.53% Return on Total Capital is 38.7% higher than the industry average of 6.87%. Furthermore, the stock’s 2.93x trailing-12-month asset turnover ratio is 250.4% higher than the industry average of 0.84x.
KR’s sales for the third quarter ended November 4, 2023, came in at $33.96 billion. Its operating profit increased 8.4% year-over-year to $912 million. Its adjusted net earnings rose 8.6% over the prior-year quarter to $698 million. Its adjusted EPS came in at $0.95, representing an increase of 8% year-over-year.
Analysts expect KR’s EPS and revenue for the quarter ending January 2024 to increase 14.8% and 6.3% year-over-year to $1.14 and $37.01 billion, respectively. The company has an excellent earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters. The stock has gained marginally year-to-date to close the last trading session at $44.67.
KR’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has a B grade for Growth, Value, and Quality. It is ranked #13 in the Grocery/Big Box Retailers industry. Click here to see KR's other ratings for Momentum, Stability, and Sentiment.
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WMT shares were trading at $154.93 per share on Tuesday morning, up $0.63 (+0.41%). Year-to-date, WMT has gained 10.52%, versus a 20.73% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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