With retailer earnings gearing up, get ready for another round of the grocery and discounter wars, featuring extra pressure from tariffs.
The SPDR S&P Retail ETF (ticker: XRT) is down nearly 4% in 2019, and the continuing trade war has played a role in that pessimism, as escalating tariffs have started to hit more goods. While many retailers have in started to shift and diversify their supply chains as a result, that change hasn’t happened quickly enough in some cases. However, some of the biggest players, including Amazon.com (AMZN), Target (TGT), and Walmart (WMT) have managed to sidestep these concerns. Their stocks have notched double-digit gains year to date, as investor applaud their business improvements, overall resilience, and general dominance in the sector.
That trend may continue, says Telsey Advisory Group’s Joseph Feldman. When it comes to grocery retailers, the big will likely keep getting bigger—favoring Target and Walmart, he writes. “The mass merchants continue to leverage their scale, customer insights, technology, and balance sheets to gain market share,” Feldman says. “Ongoing industry consolidation also should help.”
This isn’t anything new. We’ve seen these two, along with Amazon’s Whole Foods, taking a bigger and bigger bite of the food retail pie in recent quarters. And it also explains, to an extent, why Kroger stock (KR) has slid nearly 16% in 2019, as investors worry about competition. For his part, Feldman notes that the company is making progress, and has defensive qualities, especially when it comes to consumer demand and tariffs.
Feldman thinks Target and Walmart are in good shape to face tariffs as well. “These megaretailers should be able to manage tariffs more effectively, given their wider product base and global sourcing capabilities.” That leaves his earnings estimates for both slightly ahead of consensus for their second quarters. He’s also positive on the dollar stores, specifically Dollar General (DG), which sports a “consistent, solid performance and its proactive supply chain investment should support growth,” with limited tariff exposure. Dollar Tree (DLTR) has more risk from trade, he notes, although he thinks it’s making progress with its turnaround of Family Dollar.
Despite the trade war, most retailers have nonetheless kept their outlooks relatively intact, planning to offset tariffs with price increases. While that may be less of an issue for food than furniture, it’s still something investors will want to hear more about when these companies report in the coming weeks. That’s especially true for companies with higher exposure to China supply chains, including Dollar Tree, Big Lots (BIG), Five Below (FIVE), and, to a lesser extent, Target.
Date: August 15, 2019