Scary Consumer Charts and 2 Investment Opportunities

If you believe that the consumer is struggling right now, then these charts will help verify your beliefs. However, you should also note two quality investment opportunities despite these trends.

Jul 17, 2014 at 10:00AM

 When investing in retail, look at comps performance. Comps measures sales at stores open at least one year, and it's a great indicator of demand for a retailer's products as well as customer loyalty. How do you think Wal-Mart Stores (NYSE:WMT), Target (NYSE:TGT), and Staples (NASDAQ:SPLS)are performing in this key metric? 

First take a look at Target's comps performance in 2007 and 2008 and since 2012, courtesy of Alhambra Investment Partners:

ABOOK May 2014 Target Comps

The theory many investors and analysts have is that we're in a similar time prior to the 2008 financial meltdown, and if that's not the case, then the consumer hasn't fully recovered.

But even if you exclude this potential factor, Target's data breach and Canadian operations have hurt, not helped. The data breach impact will pass, but if Target continues to invest in Canada and it doesn't pan out, then it's going to hurt the bottom line, which is what we don't want to see as investors. 

Off the wall?
If you look at Wal-Mart's comps sales for the same time frames, then you might notice a disturbing trend. Is it possible that the low- to middle-income consumer is seeing weakening discretionary spending levels? With reduced government benefits, a lack of wage growth, and student-debt burden for younger consumers, this appears to be so:

ABOOK May 2014 Target Walmart

You might notice the comments in the chart, and those comments make sense, but...Wal-Mart has a significant future growth driver with its small-box stores.

While the pilot programs for Walmart Express have gone well, Neighborhood Market has already delivered in a big way. It has delivered comps gains for 46 consecutive quarters, and comps increased 5% in the first quarter year over year. Better yet, Neighborhood Market has seen strength in all segments, including produce, meat, adult beverages, and pharmacy. 

Keep in mind that if the stock market were to tank, it wouldn't impact Wal-Mart customers. They're already at the bottom. Therefore, if Wal-Mart can deliver positive results despite a hesitant consumer, then it's highly likely that Wal-Mart will continue to invest in this segment, which would lead to market share gains. This is in addition to Wal-Mart being ranked No. 4 by Internet Retailer in terms of sales (for online sales). It only trails (NASDAQ:AMZN), Apple, and Staples (Apple just stole the No. 2 spot from Staples). 

Out of the office
Since Staples relies heavily on e-commerce sales, let's look at revenue instead of comps:

ABOOK May 2014 Target Staples

Not only has Staples lost its No. 2 online sales ranking, but its business unit income declined to 3.5% of net sales in the first quarter versus 6.2% of net sales in the year-ago quarter.

Staples is shifting from office supply needs -- due to the trend toward the paperless office -- to essentials. These essentials range from goggles to mops to coffee to dog biscuits. This might work, but it's going to lead to a lack of differentiation. And by offering everything -- it's currently adding thousands of products online per day -- it pits itself up against Amazon.

Staples' 2014 restructuring plan is expected to lead to $500 million in savings by the end of fiscal-year 2015. Staples will close 250 underperforming North American stores, and it will cut costs in its supply chain, labor force, and IT hardware.

Any company can cut costs to improve its bottom line, but doing so while also growing its top line is difficult. Those are the types of investments we want to find, but Staples doesn't fall into that category.

Staples' North American commercial sales increased 0.7% year over year, but the overall picture is still very challenging, especially when it's now up against Amazon online and Wal-Mart (and Target) in the brick-and-mortar space. And, yes, Wal-Mart and Target are also growing e-commerce threats. Furthermore, consider that Staples has seen its revenue decline 6.2% over the past five years (trailing-12 months) while selling, general, and administrative expenses have only declined 2.2%. This indicates a lack of efficiency.

Amazon, on the other hand, has grown its top line 260.2%, while selling, general, and administrative expenses have grown 252.1% over the same time frame. This is a sign of quality efficiency.

Wal-Mart has also been impressive in this regard over the same time frame, with its top line outpacing its selling, general, and administrative expenses: 18.7% versus 17.1%.

The bottom line
Amazon is the No. 1 online retailer in the world measured by sales , and there's no reason for this to change in the near future. Given the consistent growth in online shopping, Amazon should continue to grow.

Wal-Mart's comps might not be impressive, but if you focus on one of its biggest future growth channels -- small-box stores -- the future looks bright.

Target is facing too many headwinds for immediate consideration. However, it should eventually recover.

Staples would require a bigger turnaround and should be avoided unless you're a big risk taker. 

Even more potential than Amazon! 
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends The Motley Fool owns shares of and Staples. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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