Four Retailers Ready to Go Back to School

With back-to-school season underway, retailers across North America are hoping to see a seasonal bump in sales as students and parents scramble to shop for clothes, stationery, and other school supplies. However, this year things could look a little different.

Millions of jittery parents are unsure what the reopening of schools means for their kids’ health and well-being. They’re looking for more signs and clarity around government plans, as well as safety measures proposed and put in place by school boards. While there could be implications for retailers, it isn’t all doom and gloom.

The school-related stockpiling is inescapable. What it would look like could be a function of whether students opt for in-person or online learning or a combination of both. For the following retailers, it could mean a difference between a seasonal spurt versus sales stretched out over a few months as better management of the COVID19 crisis paves the way for more in-person learning. It must be noted that these retailers have multiple revenue steams generated from diverse portfolios that are highly attuned to changing consumer behaviour and market trends.

The largest U.S. retailer by sales, Walmart (WMT) sells a variety of general merchandise and grocery items across the U.S. (77% of sales in fiscal 2020), Mexico and Central America (6%), the U.K. (6%), and Canada (4%). At home, the retailer generates 56% sales from groceries, while general merchandise accounts 34%, and another 10% comes from health and wellness items.

The biggest challenger to Amazon, Walmart is quickly ramping up its e-commerce offerings through its own site, shoes.com, India-based Flipcart.com, as well as its 10% ownership of Chinese online retailer JD.com. “With unrivalled scale, prodigious procurement strength, a strong brand, and a growing e-commerce platform, Walmart is the only American retailer that can compete comprehensively with Amazon’s retail offering,” says a Morningstar equity report. While the retail environment is intensely competitive, being disrupted by Amazon, Walmart could hold its own, the reports adds.

The retail giant recently showed interest in buying the popular short-form video application TikTok in partnership with Microsoft, potentially opening a new battlefront with Amazon. The grocery giant plans to launch a membership program, Walmart+, a subscription-based service to compete with Amazon Prime. “Walmart should be able to compete aggressively, particularly for the roughly 50 million households we estimate do not subscribe to Amazon Prime,” says Morningstar equity analyst Zain Akbari, who recently upped the stock’s fair value from US$111 to US$116, prompted by bumper Q2 results.

The online retail juggernaut, Amazon (AMZN) racked up US$281 billion in 2019. Online product and digital media sales accounted for 50% of net revenue in 2019, while commissions, related fulfillment and shipping fees, and other third-party seller services (19%), Amazon Web Services (13%), Prime membership (7%), made up the bulk of the rest.

Amazon is the direct beneficiary of some of the trends that emerged or accelerated during the pandemic. “As containment efforts persist and consumers isolate themselves, certain Amazon services will continue to see increased adoption,” says a Morningstar equity report, adding the company “finds itself in a unique position amid the global COVID-19 outbreak.”

While demand for online shopping spiked due to lockdown, the shift to telecommuting boosted its cloud business (AWS) which benefitted from increased enterprise cloud computing, storage, networking, content delivery, mobile app, and digital security usage, the report says.

“We view Amazon as the most disruptive force in retail [boasting] operational efficiency, network effect, and laser focus on customer service which provide sustainable competitive advantages that traditional retailers cannot match,” asserts Morningstar sector strategist, R.J. Hottovy,” who recently raised the stock’s fair value from US$2,750 to US$3,500.

Amazon, which owns one of the widest economic moats in the consumer sector, is likely to reshape retail, digital media, enterprise software, and other categories for years to come, he adds.

Dollar Tree (DLTR) operates 7,500 namesake discount stores in the U.S. and Canada, and more than 7,700 Family Dollar units. The eponymous chain sells branded and private-label goods at US$1 ($1.25 in Canada) apiece. Nearly half of its 2019 sales came from consumables (including food, health and beauty, and household paper and cleaning products), about 45% from variety items (including toys and housewares), and 5% from seasonal merchandise.

The company has seen a jump in second-quarter same-store sales as an economic downdraft and rising unemployment due to COVID-19 forced consumers to shop at discount retailers. “Dollar Tree's namesake banner has a long history of strong performance, enabled by its differentiated value proposition,” says a Morningstar equity report, noting the company’s “wide assortment of products at US$1 or less has appealed to customers, drawing a broad range of low to middle-income consumers.”

The concept, the report says, still has room to grow with rising square footage as it expands to new markets. “The chain's fast-changing assortment creates a treasure hunt experience that draws customers and is difficult for online retailers to match,” says Akbari, who recently lifted the stock’s fair value from US$79 to US$85, prompted by better than expected quarterly performance.

Small basket sizes and the average transaction resulting in a modest bill insulate the company against the digital threat, adds Akbari.

One of Canada’s largest grocery, pharmacy, and general merchandise retailers, Loblaw (L) owns chains of stores including Loblaws, No Frills, Maxi, and Canada’s largest pharmacy chain, Shoppers Drug Mart.  It also owns a fashion brand, Joe Fresh, and carries a robust private-label assortment including President’s Choice and No Name.

The firm is a go-to option for many Canadian students and parents who routinely stock up on and replenish new clothes and school supplies at the beginning of and throughout the school year.

With over 2,400 locations, Loblaw boasts the most extensive store network in Canada. “According to management, a whopping 90% of Canadians live within 10 kilometres of a Loblaw retail location,” says a Morningstar equity report.

Loblaw has had tremendous success with many of its proprietary trademarks like President’s Choice, Life Brand, and No Name. These names “behave like typical consumer packaged goods brands and have achieved pre-eminent status in terms of popularity and penetration,” says Morningstar equity analyst Nicholas Johnson, who says President’s Choice and No Name are the number-one and number-three brands, respectively, in Canada, citing Nielsen sales data.

The retailer’s large store network affords it unparalleled access to consumers. “In food, the firm has a strong presence across store concepts [while] in pharmacy, Shoppers Drug Mart gives the firm disproportionate exposure to urban population dynamics,” notes Johnson, who puts the stock’s fair value at $71.