Tag: stocks

Walmart in decline

The “Oracle of Omaha”, Warren Buffet, has dropped Walmart from his portfolio like a ton of bricks, pronouncing ominously that a retailer in decline is difficult to turn around.

Buffett’s Berkshire Hathaway investment vehicle sold off $900-million of Walmart stock in the last quarter, or about 90% of what he had left after years of slowly reducing his holding in the biggest big-box of all.

Pundits the globe over are seeing Warren Buffett’s rejection of Walmart as symptomatic of a broader malaise in traditional retail, embattled as it is by rocketing online sales.

“It is a big, big force,” he pronounces in doom-laden tones, “and it has already disrupted plenty of people and it will disrupt more.”

He avers that many businesses have worked out neither how to cash in nor how to counter it, a view which no doubt informed his Walmart decision.

Brick and mortar retailers had better figure out, and fast, how to compete with the online version or the carnage will continue.

Source: www.tradeintelligence.co.za

The back-to-school (BTS) season is characterised by many things: the collective dread of students losing their newfound summer freedom; parents sharpening their fangs in preparation for the hunt; and major retailers stocking up for what will soon become a battleground. Paper, pencils, pens, erasers, notebooks and much more are the upcoming spoils of war and everybody wants a piece.

Let’s take a look at how consumers may behave, along with the retailers that will likely experience high activity in the weeks to come.

What is the back-to-school season?

The BTS season is the time of year during which parents buy school supplies and clothing for the upcoming school year. This time period generally lasts from mid-July until early September, with Labor Day usually serving as the symbolic beginning of the school year.

Department stores generally respond to this time period by issuing sales for these items in order to compete with rivals for foot traffic. Although costs vary, this time of year is hectic for both parents of kindergarteners and college students alike.

What does the research show?

The National Retail Federation (NRF) recently released the results of their annual consumer survey concerning the 2016 BTS season. Overall, it shows that families are more likely to spend freely on school and college supplies this year. Although still focused on finding sales, families appear to be largely less worried about the economy now than before.

As per the NRF’s data, total K-12 spending is projected at $75.8 billion, up from the $68 billion total of last year. Families plan to spend an average of $673.57 on clothing, electronics and supplies, compared to last year’s $630.26.

Families of college students are spending an understandably higher average of $888.71, which is lower than the $899.19 of last year. However, total spending this year is projected at $48.5 billion, over $5 billion higher than last year, as more consumers enter this market domain.

A stronger economy is correlated with increased consumer confidence, and this year’s data reflects the likelihood that BTS shopping will remain as busy as ever.

Stocks to watch

Analysts have raised Wal-Mart earnings estimates upward for both Q2 and Q3 FY 2017, which each encompass roughly half of the BTS season respectively. Q3 Estimates currently stand at $0.94 in earnings per share compared to $0.93 just 60 days ago. Estimates for this fiscal year stand at $4.27 compared to $4.24 60 days ago.
Wal-Mart is the largest retailer on the planet with a growing online presence. Although the classification has some gray areas, NRF data shows that 60.5% of consumers plan to shop at discount stores, an umbrella that Wal-Mart does fall under.
Wal-Mart offers many sales early on in the season, and also price matches other BTS deals in order to remain competitive. It is likely that this goliath will continue to experience high foot track this season.
Wal-Mart currently sits at a Zacks Rank #2 (Buy).

Analysts have not revised estimates for this or next quarter, but one has revised estimates downward for this fiscal year. The current fiscal year estimate stands at $5.16, down one cent from estimates 30 days ago.
As of 25 July Target currently offers up to 15% off school supplies. However, these generally scale higher as September draws nearer. Target had guided estimates down for the current fiscal quarter, which they will report on in mid-August.
Although it has underperformed its industry peers, the BTS season provides an opportunity to serve as a much needed catalyst for Target, which currently sits at a Zacks Rank #4 (Sell).

Analysts have overwhelmingly revised earnings estimates downward for FQ4, which ends in August. Current estimates stand at $1.73 in earnings per share, down from $1.78 60 days ago. Estimates for this fiscal year are also down to $5.29 from $5.30 60 days ago.
Costco has experienced disappointing comparable-store sales performance, and has missed the Zacks Consensus Estimate on revenue for six quarters in a row. Although COST continues to face stiff competition that could hurt margins, it remains a dominant warehouse retailer going into the BTS season.
For the last few years, Costco has reported increased net sales year-over-year in FQ4. Although it is difficult to attribute that solely to BTS shopping, it does likely play a role in the boost. Like other companies, Costco is also offering various sales on school supplies, which like the rest of its merchandise, the company offers in bulk.
Costco currently sits at a Zacks Rank #3 (Hold).

Best Buy
Although estimates for the current quarter (ending in July) are down, there is 50% agreement in upward earnings estimate revisions for next quarter, which encapsulates BTS shopping. The Zacks Consensus Estimate has decreased a cent to $0.46 in the last 30 days, but the company has surprised on earnings for fourteen quarters in a row.
Best Buy faces stiff competition from industry peers, but offers numerous BTS deals on various devices that could bring in higher traffic and sales in the quarter to come. Either way, considering Best Buy’s current streak, outlook isn’t as bleak as it may seem.
Best Buy currently sits at a Zacks Rank #2 (Buy).

Amazon has experienced upwards earnings estimate revisions for both the current and next quarters. Current estimates stand at $1.14 and $0.96 in earnings per share, up from $1.10 and $0.93 respectively.

NRF data shows that 46% of consumers plan on doing some amount of BTS shopping online, up from 35.8% last year. Considering Amazon’s very strong position in the e-commerce industry, it is in position to benefit directly from this notable boost in online shopping activity.
Although Amazon offers items in all departments, the BTS season could still provide further support to what has already been an already amazing run for the company.
Amazon currently sits at a Zacks Rank #3 (Hold).

Although not as major as the holiday season, the BTS season offers a lot of opportunity for many companies. I vividly recall going to the store as a child in the last week of August and seeing aisles upon aisles of empty shelves in the shopping aftermath.

The BTS season will surely benefit some companies more than others, but investors should keep an eye on its position as a potential catalyst over the next six weeks or so.

Source: www.nasdaq.com

Office Depot stocks are in serious trouble. Its hoped-for acquisition by rival Staples appears less and less likely, even as its business continues to be eroded by online retailers.

Office Depot shares rallied starting in late 2014 and early 2015, first on speculation about a merger and then on official confirmation of it. Staples said it would pay $7.25 in cash and 0.2188 of one of its own shares for each share of Office Depot.
Since then, the stock’s trajectory has been lower because of concerns the deal wouldn’t pass regulatory muster. Over the past year, shares have lost 43%.

What lies ahead for Office Depot?

First let’s explore the merger in greater detail. Investors had poured into the stock hoping to receive a nice payout from the eventual Staples acquisition. But the Federal Trade Commission in December filed a lawsuit to stop the acquisition, and Staples’ challenges to regulators have already suffered at least one crucial setback.

And even though both companies recently agreed to sell some assets after their deal is completed in order to assuage regulators, the FTC hasn’t veered from its opposition. Now a March courtroom battle looms. The companies have extended the merger termination date to May 16 in order to give themselves enough time to try to win the legal fight, but investors shouldn’t hold their breath, given how firm the government opposition is.

Now let’s look at expectations for Office Depot’s coming earnings report and what they indicate about its underlying business.

Office Depot plans to report earnings for the quarter that ended 26 December 2015 on Tuesday 23 Febrauary. On average, analysts expect adjusted earnings per share to increase to 11 cents from 7 cents a year earlier, but revenue is expected to drop 7,2% to $3.56-billion.

Declining revenue is the trend, too. The company missed revenue expectations in all of the past four quarters. Analysts also expect sales to decline year over year in the current fiscal quarter and for all of fiscal 2016, which ends on 26 December this year.

The declining revenue appears to have two causes. First is store closures and other adjustments linked to the deal with Staples. Second is the challenge to traditional office supply retailers from online competitors – most notably Amazon.

When Staples announced the Office depot acquisition, it said that cost savings from the deal would total at least $1-billion by the third full fiscal year after the deal closed. It’s true that a combined company (which we’ve noted appears more and more unlikely anyway) would benefit from lower costs and a smaller retail footprint, but the real problem is sales stagnation for both of these companies, combined or separate.

Reversing that stagnation requires that they refocus their efforts more on online sales. But even if they do that, success is by no means guaranteed, because Amazon is such a formidable competitor.

Investors should be very cautious about Office Depot stock at this time. Don’t be fooled by the forward price-to-earnings ratio of less than 10. This stock is cheap for good reason.

By Chiradeep BasuMallick for www.thestreet.com

Shares of various paper and packaging companies tumbled on Monday following a slew of analyst downgrades driven by concerns over pricing. International Paper was down about 10% shortly before the market closed on Monday, while smaller players Graphic Packaging Holding Co and Packaging Corp of America were down 9,6% and 12,3% respectively.

Earlier in the day, Graphic Packaging was down as much as 10,7%, while Packaging Corp of America bottomed out at a 13,1% loss.

What’s going on?
International Paper and Packaging Corp of America were hit with downgrades, along with other companies in the same sector. Citi cut its rating for both companies to neutral, and its price target for International Paper stock dropped to $38, down from $45. Macquarie downgraded KapStone Paper & Packaging, while Bank of America cut its rating of WestRock. Both of those stocks also suffered heavy losses on Monday. Graphic Packaging didn’t catch a major downgrade, but the stock slumped along with the rest of the sector.

The main concern cited by Citi relates to pricing. In January, kraftliner prices declined by 2.4% to $15 per tonne, while corrugated medium prices fell 3,7% to $20 per tonne, according to Citi. Given that these products are largely commodities, falling prices could signal that the sector is getting more competitive, which could lead to further price declines going forward.

This downgrade from Citi comes a little more than one month after the firm listed International Paper as a top value stock for 2016. International Paper’s revenue has been essentially flat for the past decade, but the company has been generating substantial free cash flow over the past few years. In 2014, the company reported $1.7 billion of free cash flow, up from just $856 million in 2010. The company’s operating margin over the past 12 months was 13.3%, well above the 3.3% operating margin the company managed in 2010.

Packaging Corp of America is also coming off of some highly profitable years, with an operating margin of 12% in 2014, compared with 7,6% in 2010. Over the past 12 months, Graphic Packaging has managed an operating margin of 10%, well above its 5,4% operating margin in 2010.

Citi pointed out that during previous periods of price declines, list prices fell in a “disorganised fashion” for months. With profitability for all three companies at high levels, falling prices could lead to margin erosion in the coming months.

Shares of International Paper, Packaging Corp of America, a Graphic Packaging have all slumped over the past year, even before the declines on Monday. For all three stocks, this decline was preceded by substantial multiyear gains, coinciding with increasing profitability.

When considering companies in cyclical, commodity industries, it’s always important to understand that profitability can fluctuate from year to year. All three stocks look inexpensive based on forward earnings estimates, but those estimates will likely decline given the current pricing environment. Buying shares of a company based on peak earnings is a recipe for overpaying for the stock.

Predicting where paper and packaging prices will go in the coming months is next to impossible. Further price declines are possible, which could cause margins at all three companies to contract. The most optimistic scenario is that these price declines are a one-off, with prices stabilising and margins remaining high.

While analyst upgrades and downgrades should always be taken with a grain of salt, the concerns that Citi and other firms have about International Paper, Packaging Corp of America, and the rest of the sector should not be ignored by investors looking for bargains.

By Timothy Green for www.fool.com

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