Still time to buy a share of world's largest retail chain

by Rodney Hobson from interactive investor |

After a record Black Friday, the outlook for retailers improved, and they don’t get bigger than this.

Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.

The US retail sector is holding up remarkably well despite worries over the disruption caused by consumers switching to online sales and by President Donald Trump’s tariff wars. The big selling weekend just ended, including Black Friday and Cyber Monday, has gone better than many analysts had feared, and the sector can look forward to the important Christmas season with confidence.

With Thanksgiving falling late this year, on 28 November, the Christmas selling season that traditionally starts the following day is squeezed, so it was important to get off to a strong start.

Admittedly, Americans are not breaking down the doors at dawn on Black Friday as they once did – nearly 60% of US consumers turned out for the sales four years ago but the figure is down to about 36% now – but the National Retail Federation reckons US consumers will spend an average of $1,048 this festive season, up about 4% on last year.

"Consumers are in good financial shape and willing to spend a little more on gifts for the special people in their lives this holiday season," Matthew Shay, chief executive of the NRF said optimistically this weekend. The retail industry remains confident that the strong labour market will continue to propel consumer spending.

In fact, many consumers decided not to wait for Black Friday and, lured by early cut-price offers, abandoned their turkeys on Thursday to pile up purchases a day early.

The key factor is the switch to online shopping, with more than half of Americans now doing most of their buying on the Internet. Online spending on Thanksgiving Day was estimated to be 15% higher than a year ago.

While Amazon (NASDAQ:AMZN) has been the major beneficiary of this trend, it also helps traditional brick-and-mortar chains such as Walmart (NYSE:WMT) and Macy's (NYSE:M) that have evolved to embrace the new sales channels.

The impact of tariffs on China is more problematic and is an issue that could cloud the future of the sector, as the country is a major supplier of goods to US retailers. Despite several false dawns, no agreement is in sight. Richard Hunter, interactive investor’s head of markets, reported in September that retailers were warning of potential hits to profits as new tariffs came into force.

Walmart is seen as a heavyweight that has the scope to rearrange its supply chain and squeeze suppliers to trim prices, although it may have difficulty in passing on higher costs from tariffs.

Source: interactive investor  Past performance is not a guide to future performance

Walmart reported a solid third-quarter performance to 31 October, with revenue up 2.5% on the previous third-quarter to $128 billion and pre-tax profits soaring 70% to $4.37 billion. The gains were mainly in the US. Over the first nine months of 2019, pre-tax profits more than doubled to $14.44 billion on revenue up 1.8% to $379.32 billion.

The group now expects underlying earnings per share for its current financial year ending 31 January to increase slightly from the $4.91 recorded in the previous year.

It is important that the new chief executive of Walmart US, John Furner, carries on the good work there and brings new impetus to what is the most important part of the group. Furner was head of Sam’s Club, Walmart’s members only warehouse club.

Walmart shares had a good run from $86 just before last Christmas to a peak of $121 three weeks ago. They have come off the boil and, at under $119, represent a buying possibility. The yield is admittedly a little thin at 1.77%, but the price/earnings ratio of 23.9 should not prove too demanding given the way the US economy is holding up and does not allow for any easing of trade tensions should that happen.

Hobson’s choice: Buy for as long as the share price remains below the recent high of $121.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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