By far the most interesting sector to watch and also perhaps one of the oldest forms of business is the retail and consumer goods sector. In a broader view this sector comprises of product brands and brands that sell the product brands. Even though the stock market segregates them into cyclic and non-cyclic category however they all fall under the broad spectrum of consumer goods arena. There are brands ranging from Johnson & Johnson (JNJ, Financial) to Coca-Cola (KO, Financial) ruling the consumer section for decades and then we have the brands like Wal-Mart (WMT, Financial), Costco (COST, Financial) and Target (TGT, Financial) that sell these brands. Investors can either invest in the brands or in the brands that sell the brands or both. Let us take a quick look at how the second category that is the "brand selling brands" is doing in the wake of stiff competition in the sector and from their online peers.
Brand retailers
As an investor before putting in my hard-earned money in any company I would like to first understand the company and then the position of the company against its peer group. As I had stated earlier of the two segments in the consumer goods section I would prefer the more interesting retailer segment and find out who is ruling the roost.
The 3 top retailers that I would take a dig into are:
- Walmart
- Costco
- Target
Amazon (AMZN, Financial) is probably the biggest competitor of all the three retail stores across the globe and is also the biggest competitor to all conventional retail stores; however, we will give it a miss owing to the fact that its modus operandi is quite different and also that it does not pay dividends. Here I would like to look for companies with an economic moat that have established themselves into serving us in our daily needs and has become an integral part of our basic life.
The number game
Amongst the three Walmart looks to be in the best of the shapes since it stands tall in almost all attributes of its category. Both Walmart and Target have been the most consistent when it comes to dividend payout. However as an investor only, dividend is not what I look for. Along with a handsome dividend I would also be interested in the health of the business. This is where Walmart stands out. Walmart has been able to do so while their earnings are also moving upwards consistently while Target has been struggling as payout almost 90% of their total earnings on a YoY basis hence even though from dividend payout angle both the players look stalwart but in case of Target it is happening at the cost of the business health.
With all of them you can expect an upward trending payout by at least 15%.
Outlet spread
The number of outlets does signify the strength of the company to generate sales numbers across the map. If the company has outlets outside its home turf, it clearly reflects the capacity of the management to manage supply chain and encourage sales in a land of diverse population demography. Evidently Walmart has been leading in this quartile from the fact that Walmart has outlets not just in the American continent but has been dotting across the globe.
On the contrary the ride for Target away from the home ground has been quite bumpy and that is evident from its struggle that it has been facing in Canada. Costco, on the other hand, is doing well and has room to grow.
EPS factor
Earning per share is clearly one of the most important tool used to assess the health of a business from the investor’s perspective. Walmart and Costco have trends that are within the positive range and has an upward thrust which is a real good indication as an investor however in the case of Target there has been noticeable inconsistency in its EPS ratios and had displayed extreme results over time and inconsistency is something any prudent investor would like to avoid in the first place.
I would rather prefer a flat to a slightly up trending EPS ratio that would indicate a consistent growth in EPS year over year.
Investor’s take
As an investor it might be incorrect and rather deceitful to judge a company by the performance of its store in one particular location. However it is more important to judge the business from its overall performance taken the position of all its stores collectively in an investment call. Profitability of the business is more important than the profitability of a particular store.
Walmart’s share price has been on the rise for quite some time as it recently hit the 52-week high levels. Even when it reached the new high, its P/E is still better than its competitors along with a good earnings yield and a safe dividend payout ratio. This makes Walmart the obvious choice for any investor looking to own a slice of the conventional retail sector. Target and Costco is over dependent on the North American economy for their number mix and if there is any downside chance to the economy it reflects adversely on the commercials of the company as well. While Walmart is more matured when it comes to its commercials since it can weather more turmoil with its international presence and take advantages from different tax treatment overseas. It can also improve its P/E ratio and dividend payout ratios considerably by operating in developing countries like India where the cost to the company is relatively lower thus ensuring better overall margins for the company.
Hence from the investor’s perspective I would rather add positions in Walmart to enhance my portfolio in the retail sector and keep a close watch on the functioning of Costco as it has plenty of scope for improvement.
