Moving into the new year, many investors eyeing retail stocks were cautious following reports that holiday sales would be disappointing. In addition to the holiday season having six fewer days, buying patterns were also unfavorable.
A Morgan Stanley report predating the holiday season indicates that consumers relocated their discretionary spending away from apparel. Generally, people spent more on durables such as appliances, home improvements, and auto than on apparel. Auto sales, for instance, reached 15.6 million units in 2013, the best since 2007. This affected U.S retailers, which, as we have covered extensively in previous articles, engaged in heavier-than-usual promotional activities during the holiday season.
However, the retail landscape is changing. Evidence that the economy is back on a sure path to recovery is compelling. This conclusion has not been informed by a few data points. The indications of recovery are not only abundant but paint a clear picture. The Consumer Price Index, for instance, rose 0.3% in December, the highest gain in six months.
Toyota U.S. chief Jim Lentz also previously said that US auto sales are approaching the "leveling off" region, implying that demand for fast-moving retail goods will increase relative to durables. Not to mention, the Fed's decision to curtail the stimulus program was informed by confidence in the economy's long-term outlook.
A stronger economic outlook presents the perfect backdrop for retailers to bounce back. Wal-Mart Stores (NYSE:WMT), in particular, presents a unique opportunity for long-term investors.
Emerging ahead of the competition
Inevitably, the continued increase in consumer confidence and propensity to buy fast-moving goods will stage increased competition among U.S. retailers. Wal-Mart, however, is well positioned to come out ahead of the competition.
Best Buy (NYSE:BBY) reported a decline in sales during the holiday season. It was a double whammy for the retailer; its heavy promotional activity not only significantly squeezed operating margins, but also failed to boost sales.
In the nine weeks leading up to Jan. 4, Best Buy's sales excluding newly opened or closed stores fell 0.9% in the U.S. This signals that Best Buy doesn't have the scale to compete in a heavy promotional environment. In view of the expected upsurge in demand going forward, larger competitors like Wal-Mart will certainly have an edge over Best-Buy.
Another trend to watch is the continual increase in online sales. As more people shop online, security becomes increasingly important. Target (NYSE:TGT) is an avid competitor. However, the recent credit card debacle that affected some 70 million customers means it is open season for its online shoppers. In addition to credit card information, personal information -- which is used to tailor unique, personalized online shopping experiences -- was also stolen from Target's database. Before Target moves past this phase, Wal-Mart will have the opportunity to rope in some of Target's online users, who now feel more reluctant to share personal information crucial to unique online shopping experiences.
The real clash of the titans, as far as Wal-Mart is concerned, will be Amazon.com (NASDAQ:AMZN). Amazon has a formidable online business, and there will certainly be a pull and push between it and Wal-Mart. However, still, Wal-Mart has accelerated its online shopping efforts. For instance, it has introduced 'Lockers,' a concept first originated by Amazon that allows customers to order items online and pick them up at stores, enabling it to include the section of its online shoppers who don't have bank accounts and credit or otherwise don't want to divulge similar information.
However, the greatest catch for investors is not Wal-Mart's competitive edge but its great fundamentals. Finding a sweet spot in the currently-overvalued market is really challenging. One estimate from Goldman Sachs places the valuation for the S&P 500 index for the aggregate market at 15.9 times and the median stock at 16.8 times. Wal-Mart, on the contrary, has a P/E ratio of 14.6, which signals a lower valuation relative to the broader market. This suggests that Wal-Mart's future earnings growth will be relatively proportionate to share-price appreciation, preventing a mass sell-off and unrealistic buying frenzies, which drive away long-term investors.
Unlike Best Buy, Wal-Mart's share price is less volatile and offers clarity into the future. Although Best Buy gained more than 200% in 2013 on turnaround prospects, it is now facing a massive sell-off following the aforementioned dip in holiday season sales. This has wiped off a significant part of its 2013 rally. Wal-Mart, on the other hand, gained slightly more than 10% in 2013. Long-term investors would rather go with a stock that is not only well valued, but has a realistic and sustainable growth trajectory; a stock like Wal-Mart.