Our Walmart CPG price tracker through last week shows a continuation of price cuts, especially in Food. Our Food basket is flat sequentially and down 1.1% y/y, while our HPC basket is down 0.3% sequentially and up 0.9% y/y. For U.S. based food companies, we continue to see risk around the pricing environment if Walmart reinstates a new round of price cuts.
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Target’s ability to maintain its strong sales growth while delivering another quarter of profitability, with 32bps of gross margin expansion and 51bps of SG&A leverage, was certainly a surprise. It appears to us that TGT had (and likely still does have) spare capacity in its fixed and labor asset bases for incremental productivity. While on an “all-else-equal” basis, we continue to view a digital sale and carrying a lower margin than a pure in-store sale for an identical basket, Target’s performance appears to demonstrate that there is enough excess capacity in the store that the marginal revenue exceeds the marginal cost of the digital sale. Through 1H19, TGT has demonstrated not only that it could revitalize sales growth in its stores, but that it would be able to do so without deteriorating the cost and margin structure of its business. While there is potentially upside to both earnings and multiple expansion if results continue, we see the current equity price as adequately reflecting the growth potential and long-term risks, and we remain Peer Perform rated with a Fair Value near $105 (from low $80’s).
Topics this weekend…Target's Tidings - TGT 2Q19 Consumables Corner - BJ 2Q19 Hardline Happenings - HD 2Q19 and LOW 2Q19 Quote of the Week – Walmart, Inc. (WMT, Underperform, $105 PT) President and CEO, Walmart eCommerce U.S., Marc Lore on the 2Q20 Media Call
Topics this week…
Consumables Corner – 1) Walmart appears to be implementing prices cuts, 2) CPI and PPI data continues to spell bad news for grocery retailers, and 3) SPTN earnings preview
Walmart’s World – WMT earnings preview
Quotes of the Week – Grocery Outlet (GO, Not Covered) Vice Chairman, MacGregor Read, on store expansion
Topics this week…
Consumables Corner – Southern California pricing data shows heavy deflation in the fresh category
A to Z – Amazon is having more of an impact on the consumables industry than most realize, in our opinion
Quotes of the Week – Ahold Delhaize (AD-NL, Outperform, €25 PT) CEO, Frans Muller, on strike recovery actions
Tariffs continue to be a tax on U.S. consumers and no sector, company, or consumer is likely to be untouched. Indeed, with List 4 of tariffs being brought into play this past week and the market’s sharply negative reaction, we wanted to take a look at the potential impact it would have directly on consumers and companies’ sales. Tariffs are effectively a tax on U.S. consumers/companies and could result in lower spending although some sectors will be more impacted than others according to our research. Based on our prior research around consumers’ marginal propensity to spend (here) coupled with a sensitivity analysis around average tariff rates and the amount of which are borne by the consumer, it appears housing, transportation, food away from home and entertainment (electronics) could face the most significant pressure.
Topics this week…
Consumables Corner – 1) Another market and more examples of why the Golden Age of private label is upon us 2) Smucker’s 1850 still has little traction and 3) SFM, THS, and NGVC earnings previews
Target’s Tidings – Solid remodels, but execution in consumables remains an issue
Quotes of the Week – Proctor and Gamble (PG, Not Covered) CEO, David Taylor, on the competitive environment and product innovation
Our Total Walmart basket rose this week as our Pet and Food sub-baskets moved higher. Indeed, our Food basket moved up approximately 0.1% from the prior week largely driven by price increases on Hidden Valley Ranch Dressing (CLX), Betty Crocker Fudge Mix (GIS), and Mini Wheats (K). Turning to the Pet category, our basket was up approximately 1.3% from last week as the promotional activity we saw on Smucker’s Milk-Bones has since reversed back to normal levels. Our HPC basket remained flat to last week as the category has continued to hold relatively stable since the beginning of May. On a y/y basis, Walmart’s National Basket remains up (+0.9%), Food remains deflationary (-0.5%), and HPC and Pet baskets are inflationary (+1.8% and +4.7%, respectively).
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