We had the opportunity to spend some time with both Dollar General (DG, Outperform, Target Price $165) and Tractor Supply (TSCO, Peer Perform, Fair Value $106) senior management teams (CEO, CFO and IR), as well as walk through the stores on Tuesday in Nashville.
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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.
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.
Tractor’s multifaceted approach to driving incremental sales through Neighbor’s Club, its private label credit card, Stockyard kiosks, and Buy Online Pickup In Store seem to be having a positive effect on comps, despite the headwind of a very wet Spring. However, the company experienced some delays with new store openings in 2Q19 which will likely be a headwind for overall sales into the back half of the year, on top of lapping last year’s hurricanes. Further, despite consumables (pet food and supplies, animal feed, etc.) being the strongest category in 2Q19, we see significant competition building, particularly in Pet, given the increasing success of Amazon, Walmart, and Chewy.com in this category. Taking all of this together with a valuation that is above historical averages, we continue to rate the equity Peer Perform.
Topics this weekend…
Hardline Happenings – 1) Hardline Retailers’ sales have likely been impacted by abnormally high levels of rainfall in 2Q19, 2) housing-related data could improve going forward, and 3) TSCO and SHW earnings previews
Quote of the Week – PPG Industries (PPG, Not Covered) CEO, Michael H. McGarry, on pricing actions
Topics this weekend…
A to Z – 1) Amazon ups the ante with Prime Day this year as it looks to highlight its Prime membership offering during the two-day event, and 2) Amazon to retrain 100,000 workers to keep up with new tech changes.
Walmart’s World – Walmart continues to expand its rollout of NextDay to better compete
Quote of the Week – Pepsi (PEP, Not Covered) CEO, Ramon Laguarta on pricing and category trends
Topics this week…
Consumables Corner – 1) The golden age of private label continues to grow, and 2) Longer-term structural threats to the Food Retail industry persist
Quote of the Week – AMZN is aggressively pushing Whole Foods through Prime Day promotions now through July 16th (the second and last day of Prime Day this year)
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