BY Al Root on April 17, 2020 at 8:52 am
Wall Street is starting to pick through retail winners and losers , positioning portfolios for a post Covid-19 world. But some of the obvious winners—the companies that have seen sales jump as U.S. consumers stocked up on food and household supplies, including Kroger and Costco Wholesale —aren’t getting the stock ratings from analyst that investors might expect.
Those stocks have become relatively expensive, and their growth may slow as Covid-19 fe ar fades. As a result, analysts are looking elsewhere for value in the retail space.
Shares of “essential” retailers, including Kroger (ticker: KR), Costco (COST), and Walmart (WMT), are up about 11% on average year to date, far better than the double-digit drops of the Dow Jones Industrial Average and S&P 500 over the same span. (Essential is a Barron’s division of retail, accounting for retailers that sell a lot of non-discretionary goods, such as food, as a percentage of total sales.) Costco and Walmart trade for 34 and 24 times estimated 2020 earnings, respectively, a premium to other consumer staples stocks. Kroger trades for about 12 times estimated 2020 earnings, but its sales haven’t grown like the other two retailers in recent years. Citigroup relaunched coverage of several retailers Wednesday. (Brokers sometimes transfer coverage among analysts.) Despite solid near-term trends, analyst Paul Lejuez decided to rate both Kroger and Costco the equivalent of Hold. He called Costco “best in class,” but isn’t thrilled with valuation. “Relative to other companies that are considered more defensive, [Costco] trades at a significant premium,” wrote Lejuez in his research report. His price target is $310 a share, close to where the stock is trading. “There is a capacity issue coming,” Barclays analyst Karen Short tells Barron’s. While Costco is incredibly efficient, Covid-19 isn’t allowing as many customers into stores. Same-store sales, as a result, will suffer the longer shelter-in-place mandates remain in place. “It’s the peril of doing too well,” adds Short, who also rates Costco the equivalent of Hold. Her price target is $300 a share. Lejuez and Short also rate Kroger the equivalent of Hold. Lejuez calls the stock price “fair.” His target is $32 a share. Short’s price target is $30 a share. Short does rate Walmart the equivalent of Buy and has a $135 price target for shares. Walmart is “a solid performer ” with a valuation slightly above other “staple-type” companies under her coverage, she says. Her price target is $135 a share. She also rates Target (TGT) stock the equivalent of Buy and has a $120 price target. The story at Target, however, is a little more complicated . “Discretionary sales at Target will be awful,” Short explains. “But they will be stronger coming out the back end—Target is in a great position to benefit from retail turmoil.” Discretionary sales are expected to crater in coming months. No one is shopping for much while stuck at home. Even though Target does sell “essential,” non-discretionary items, its sales mix skews discretionary—a fact that will hit overall results. But Target stock is down about 15% year to date and trades at 15 times estimated 2020 earnings. It’s a good entry point, based on Short’s recommendation. Retailers that skew even more discretionary have been hammered by the Covid-19 crisis. Department store stocks, such as Macy’s (M) and Kohl’s (KSS), have fallen about 64% year to date on average. Macy’s stock, for instance, trades for less than 4 times estimated 2021 earnings, but investors have no confidence in estimates just now. There appears to be a goldilocks scenario developing within the retail investing universe. Not too much discretionary retail exposure, and not too much staples exposure—because those stocks are expensive. What investors want is a good mix of value-oriented retailing at a good price. Target and Walmart appear to fit the bill.