The timing of the back-to-school season couldn’t be better. The economic reopening on both sides of the U.S.-Canada border has finally started to lift long-suffering retail sales figures. In Canada, June retail sales saw a 4.4% uptick, after dropping 2.1% the month before, according to Statistics Canada. Similarly, the cash-flush Americans lifted U.S. retail sales as demand for goods picked up, according to Reuters.
The trend bodes well for the retail sector approaching a seasonal sales bump as consumers in both Canada and the U.S. are set to splurge big bucks on school and college supplies for the upcoming academic year. Longer-term, spending in Canada, as well as the US, is set for strong growth over the next two years, driven by household savings accumulated during the pandemic.
This will create a strong tailwind for retailers whose product offerings and services cater to a wide variety of consumer needs that stretch well beyond school supplies. With product portfolios closely aligned with ever-changing consumer and ecommerce trends, these businesses are set to benefit from continued demand for their offerings.
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Walmart Inc |
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Ticker |
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Current yield: |
1.47% |
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Forward P/E: |
25.64 |
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Price |
US$149.3 |
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Fair value: |
US$132 |
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Value |
14% premium |
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Moat |
Wide |
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Moat Trend |
Stable |
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Star rating |
** |
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Data as of Aug. 12, 2021 |
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U.S. retail juggernaut Walmart (WMT) sells a variety of general merchandise and grocery items in the U.S. (78% of sales), Mexico and Central America (6%) and Canada (4%). The retailer generates around 56% of U.S. sales from grocery, 32% from general merchandise, and 10% from health and wellness items. The company’s e-commerce assets (12% of total sales) include its eponymous site, Flipkart and shoes.com, and a 10% stake in 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, assuring that the coronavirus pandemic isn’t likely to materially alter Walmart’s long-term standing.
The retail giant can withstand the intensely competitive retail environment and disruption caused by Amazon. Walmart’s wide moat stems from intangible assets and a durable cost advantage.
“With its scale bringing cost leverage that can be used to keep prices low, Walmart should be able to compete aggressively, particularly for the roughly 50 million households that do not subscribe to Amazon Prime,” argues Morningstar equity analyst Zain Akbari, who recently raised the stock’s fair value from US$124 to US$132.
Walmart’s size allows it to dictate terms as it constitutes a large share of many of its vendors’ sales. “Its strength translates across borders to its non-U.S. operations,” says Akbari.
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Amazon Inc |
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Ticker |
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Current yield: |
- |
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Forward P/E: |
57.14 |
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Price |
US$3,292.11 |
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Fair value: |
US$4,200 |
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Value |
22% Discount |
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Moat |
Wide |
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Moat Trend |
Stable |
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Star rating |
**** |
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Data as of Aug. 12, 2021 |
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Online retail behemoth Amazon (AMZN) rang up a whopping US$386 billion in net sales in 2020. Retail accounted for approximately 83% of total revenue, followed by Amazon Web Services (12%), and advertising services (6%). International segments constituted 27% of Amazon's non-AWS sales in 2020.
Amazon is a dominant force, particularly in e-commerce and cloud markets. “It benefits from numerous competitive advantages and has emerged as the clear e-commerce leader given its size and scale, which yield an unmatched selection of low-priced goods for consumers,” says a Morningstar equity report.
The company continues to gobble up market share despite its size as the secular e-commerce trend continues to grow unabated. Its wide moat is underpinned by network effects, cost advantages, intangible assets, and switching costs. “Amazon has been disrupting the traditional retail industry for more than two decades now, while also emerging as the leading” cloud service, says Morningstar equity analyst Dan Romanoff, who puts the stock’s fair value at US$4,200. COVID-19 has accelerated adoption of online shopping which helped Amazon bolster its dominance. Romanoff argues this “will result in economic returns well in excess of its cost of capital for years to come.”
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Dollar Tree Inc |
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Ticker |
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Current yield: |
- |
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Forward P/E: |
16.75 |
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Price |
US$102.32 |
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Fair value: |
US$99 |
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Value |
Fairly valued |
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Moat |
None |
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Moat Trend |
Negative |
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Star rating |
*** |
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Data as of Aug. 12, 2021 |
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No-frills retailer Dollar Tree (DLTR) operates in the U.S. and Canada through over 7,800 shops under both its namesake and Family Dollar units (nearly 15,700 stores in total). The eponymous chain sells branded and private-label goods, generally at a US$1 price ($1.25 in Canada).
Consumables such as food, health and beauty, and household paper products constituted nearly 50% of Dollar Tree's 2020 sales, while just over 45% came form variety items (including toys and housewares), and another 5% from seasonal goods.
“Dollar Tree's namesake banner has a long history of strong performance, enabled by its differentiated value proposition,” says a Morningstar equity report, but points out that before the pandemic, the Family Dollar unit struggled to generate top-line and margin growth.
As a result, while the company’s Dollar Tree segment is better positioned long-term, the aggregated firm lacks a durable competitive edge.
“The Dollar Tree banner's wide assortment of products at $1 or less [accounting for around half of sales] has appealed to customers, drawing a broad range of low to middle-income consumers,” says Akbari, who recently lowered the stock’s fair value from US$101 to US$99, prompted by a weaker first quarter and a higher U.S. corporate tax rate assumption.
