Reports on income from within the distribution sector (NYSEARC: XRT) were very mixed for Q2 but one thing is clear. Companies with great branding, healthy e-commerce profiles, the right demographics, and strong execution outperform their peers and the group as a whole. Williams-Sonoma (NYSE: WSM) stands out in this respect because the homeware retailer targets a high-end clientele and has not only outperformed in terms of turnover and profit, but has also been able to reiterate its long-term forecast.
Big box stores: Target (NYSE: TGT) and Walmart (NYSE: WMT) sent a wave of fear across the industry when they warned of margin squeeze and discounts in early summer. Both of their second-quarter earnings reports confirmed the weakness, but there was a difference. Target’s results were mixed against Marketbeat.com consensus numbers while Walmart outperformed by a narrow margin. The real takeaways, however, are that revenue and profit are being impacted by rising inventory and rising discounts and forecasts were lukewarm on both. On the inventory side, both companies increased inventory by 25% to 35% year-over-year despite inventory reduction activities that led to Q2 weakness, so there is still a risk of discounting and margin compression in the second half of the year. In conclusion, big box stores will certainly see stable or rising sales, but will struggle to make a profit.
DIY stores: Results of Lowe (NYSE: LOW) and Home deposit (NYSE: HD) prove that home improvement trends are still strong. The difference here is that Home Depot had a stronger Q2 but provided a weaker outlook while Lowe’s had a more tepid Q2 and provided a healthier outlook. The reason for this is the sales mix, Home Depot has more exposure to Pro channels and these channels are weakening. Both companies have scored a series of price target increases from analysts, but Lowe’s appears to be in a better position.
dollar stores: Dollar stores General dollar (NYSE: CEO) and Dollar tree (NASDAQ: DLTR) both posted solid single-digit growth over last year, but there is a clear difference here as well. While the group is well equipped for the economic environment, Dollar Tree is struggling relative to its competitor and has provided a softer outlook for the second half. The mitigating factor is that Dollar Tree reinvests in growth and profitability, so it should perform well in the long term. In the short term, Dollar General not only repurchased shares and paid a dividend, but increased the buyback authority while Dollar Tree did none of that.
Membership Outlets: Membership outlets took the spotlight with Walmart’s results, and the Sam’s Club segment is what could set it apart from Target this year. Sam’s Club has led Walmart’s growth and is supporting the outlook with an approximately 10% increase in membership and membership at record highs. This news was compounded by strong results and prospects for BJ’s Wholesale Club (NYSE: B.J.) which indicates a similar force for Cosco (NYSE: COST) next month in his report. Ultimately, inflation drives people to seek out bargains, and plenty of bargains can be found in member club warehouses. Pricemart is the outlier, however, as it grapples with supply chain issues that are amplified by its coverage territory.
Discount stores: Discount stores should be in great shape and they are set to outperform but there is a problem. Inflation reduces their traffic like everyone else and they also suffer from bloated inventory. Increased rebates from front-line merchants are also putting pressure on margins. TJX Companies (NYSE: TJX) and Ross Stores (NASDAQ: ROST) weren’t as successful as they could have been and both also provided soft advice. Ollies Bargain Outlet (NASDAQ: OLLI) reports later this week and could disappoint the market although it looks like weak results are priced into the market ahead of the release.
Walmart is part of the Entrepreneur Index, which tracks some of the largest publicly traded companies founded and led by entrepreneurs.
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