A Double Dose of Good News From Brick-and-Mortar Retail

In this segment from the Motley Fool Money radio show, host Chris Hill, Million Dollar Portfolio's Jason Moser and Matt Argersinger, and Motley Fool Total Income's Ron Gross talk about the good news in traditional retail: Wal-Mart (WMT 0.46%) and Target (TGT 1.03%) are doing better than expected. Of course, Wal-Mart still has a big challenge ahead to compete in e-commerce, and Target is attacking its problems on a host of fronts all at once. So what does the future hold for these players -- and the sector in general?

Chris Hill: We begin with signs of life in the general retail sector.

Wal-Mart's first quarter profit came in higher than expected, as did Target's, overall a better picture than we were talking about a week ago with Macy's, Kohl's, etc. Before we go big picture, Matty, this is a good quarter for Wal-Mart.

Matt Argersinger: Wal-Mart, I guess the headline there is the 63% increase in online sales, which was a big acceleration. They were doing, at this time last year, single digits. So, they've obviously ramped that business pretty well. I think you have to put it in perspective, though. Wal-Mart doesn't break out e-commerce revenue as a percentage, or even the actual number. But, according to eMarketer, their sales last year online were $14.4 billion. So, if you expect that 2017 will be a great year, maybe they grow that business 50%, they'll get to over $20 billion. Just to put that in context, though, Amazon's online sales, stripping out web services and international, just North American online sales, they're going to do about $100 billion this year.

Hill: So Wal-Mart is planning to catch up.

Argersinger: They're second, but it's a distant second. So, when I balance that against total revenue increase of 1.4%, comps that were up only 1.4%, it's going to take a lot for that business to really move the needle for Wal-Mart. It's still very early.

Hill: Ron, Target's same-store sales fell a little bit, but as management said, it's a very choppy environment out there.

Ron Gross: I love that. I saw one analyst call it "less bad."

Hill: You know what? Given what we talked about at the beginning of last week's show, less bad is pretty darn good.

Gross: As Matty said, digital channel sales, we saw an increase, 22% is a good number. Up 22%, but still only 4.3% of total revenue. It continues to be a struggle. They're going to invest $7 billion over the next few years into redesigning stores and lowering some prices and opening 100 smaller locations, it seems that's kind of the thing that everyone is trying to do now, in urban centers, college campus areas. They're trying to encourage shoppers to make bigger purchases, which is, they're copying what Amazon does with the Pantry, where you can pay one price and fill a box with stuff and ship it to you at a flat fee. They're trying to copy that a bit. So, everything was OK. You have negative same-store sales, but only slightly, so I guess that's fine. Guidance was not terrible, so we'll call it somewhat encouraging. But they have a lot of work to do, and they acknowledged that much, they said specifically that things are not where they want them to be.

Jason Moser: This week in adjectives, right? It was less bad, somewhat encouraging, OK.

Hill: Well, Jason, the point that Ron made last week, where he said, look at all these retailers, the fact is, some of them are going to be going out of business at some point. But you look at Target, you look at Wal-Mart. These are the two biggest bricks-and-mortar general retailers in the United States, and I feel like they are staking their claim, saying, "We're not going anywhere."

Moser: Sure. I think I was over picking up dinner last night from Chipotle, of all places, we were supporting the Chesapeake Bay Foundation, and I saw a store, it was RadioShack, right by there, going out of sales, entire store is on sale. I felt like a deja-vu, haven't we gone through that once before? Target and Wal-Mart are a bit different animals. I do think there's a place in this world for them, Wal-Mart particularly. There is a physical footprint there that you can't discount, and retail is ultimately about logistics. And in today's world, I think it's becoming more so, that's why Amazon has done so well.

I think for Wal-Mart, the real opportunity on the investing side is for them to figure out a way to return more capital to shareholders. We were talking about this yesterday on Market Foolery. When you look at the repurchases, for example, Wal-Mart has repurchased and brought down their share count about 8% over the past five years. You compare that to Apple, Apple has brought their share count down more than 20%. That is a tech company, that's material. So, I think there's an opportunity there for Wal-Mart. And certainly also on the dividend side as well, the yield is under 3% still. By the same token, I think, based on what Matty was saying there, it seems like they're going to continue investing in this e-commerce opportunity for some time, which is probably the right move. But again, from an investing perspective, the bigger opportunity is to get a little bit better about returning capital to shareholders.

Argersinger: Yeah, I can't help but think it's just too little too late for Wal-Mart and Target in online. But actually, I kind of hope they succeed, because the one big risk for Amazon now -- I think Amazon is going to the Moon, but the one risk is Amazon just gets too big, too influential, and some kind of regulatory antitrust actions start to come ahead to rumble. But if Wal-Mart has success online -- and Wal-Mart is already so huge, and already accounts for much more of total retail sales in the U.S. -- that makes me think that Amazon won't face any of those challenges, and Amazon can continue to grow, even if Wal-Mart and Target have some share of total online sales.

Moser: The ultimate benefit of all of this, Amazon performing so well, is forcing everybody to up their game. And we're going to see some succeed there, and we're going to see some go away. I think Wal-Mart stands a chance of succeeding as good as anyone out there, if not more so, because they've had so much success to date, and they're so big already.

Gross: When you say upping the game, for different retailers, that means different things. For some folks, that's shrinking the footprint and cutting costs to be profitable, but in a less grandiose kind of way. Target here is investing $7 billion to try to compete. There's a lot of risk in there. If you're throwing that amount of money to try to compete and you're wrong, look out below.

Hill: And on the flip side, you look at Wal-Mart making that acquisition last year of Jet.com for $3 billion in change. I think some people raised an eyebrow at that price tag. But in the early earnings here, it appears to be paying off.

Argersinger: Again, I feel like they had to do it, and the thing that Jet brought them was a lot of talent, talent and resources they didn't really have, or knowledge power. So, it's the right move, and sure enough, early on here, it seems to be paying off.