Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Posts Tagged ‘Wal Mart’

Two Important Economic Signals to Share with My Readers This Morning

By for Profit Confidential

U.S. Consumer Confidence CollapsingA good gauge for me on how consumers in the U.S. economy are faring has always been the statistics coming out of Wal-Mart.

Wal-Mart Stores Inc. (NYSE/WMT) reported its operating income in its second quarter (ended July 31, 2014) declined by 2.4%. Its subsidiary, Sam’s Club (wholesale store), saw its operating income, after taking out fuel, decline by 10.2%. (Source: Wal-Mart Stores Inc., August 14, 2014.)

For its entire 2015 fiscal year, Wal-Mart now expects to earn in the range of $4.90 to $5.15 per share compared to its previous estimate of $5.10 to $5.45 per share.

The performance of Wal-Mart is very important to economists like me because the massive reach of Wal-Mart is a good indicator of consumer spending. Wal-Mart is the biggest private employer in the world, with a staff of approximately two million, and the largest retailer in the world. More than one hundred million people visit a Wal-Mart store weekly.

So when Wal-Mart comes out with soft earnings, it gives me a reason to be concerned about the direction of consumer spending. But that’s not the only thing I’m worried about in respect to the economy.

According to FactSet, of those major public retailers that have reported their second-quarter same-store sales, 46.8% of them have reported sales below estimates.

Retail sales are stagnant for the simple fact that consumer spending is getting very soft here in the fifth year of the so-called economic “recovery.”

Below is a chart of the widely followed University of Michigan Consumer Sentiment Index.

University of Michigan Consumer Sentiment Chart

Chart courtesy of www.StockCharts.com

As you can see, consumer sentiment has tumbled to its lowest level … Read More

How It Pays to Play the Momentum Stocks

By for Profit Confidential

Why Making This Mistake Was a Good MoveI have been following social media company Twitter, Inc. (NYSE/TWTR) since the stock debuted to heightened fanfare on November 7, 2013. The hyped-up momentum play spiked to just over $74.00 on superlative enthusiasm and pure insanity, prior to its subsequent sell-off.

I must admit that Twitter intrigued me as a trade but only if the stock price broke below $30.00, as I have suggested in these pages before. Well, on May 7, Twitter declined to a low of $29.51.

For those of you who picked up some shares at this low, it was the correct decision; Twitter surged 25% on Wednesday morning on news that the company had easily beat on revenues and earnings estimates. Revenue growth was impressive at 124%, as the company was able to monetize its user base just as Facebook, Inc. (NASDAQ/FB) has done.

Twitter Inc Chart

Chart courtesy of www.StockCharts.com

Twitter grew its user base at a faster pace than the stock market expected and better yet, it was able to make advertising money from these efforts, which is what you want from social media stocks.

With these results, we are seeing numerous rating and price target upgrades for Twitter from Wall Street, which has been anxious to do something in an otherwise boring stock market.

As a trader in the stock market, I would be looking to buy Twitter on downside weakness—after all of this hoopla has faded. At this time, the valuation continues to be obscene.

The reality is that what happened with Twitter indicates the strong upside potential in Internet stocks that can be achieved for aggressive traders in the stock market. You may make … Read More

Flight to Safety Rewarding These Top Stocks

By for Profit Confidential

Investors' Flight to Safety Putting These Stocks on TopMy dad is earning a few percentage points on his fixed-income yields. Fortunately for him, that’s sufficient to live on when combined with his monthly pension and savings. He has no mortgage and lives a pretty normal, but somewhat frugal life.

In fact, Dad has always favored the fixed-income market for his investments as he doesn’t like risk. But for many Americans, the need for an ample flow of income during your retirement is a necessity for surviving, especially if the Great Recession wiped out your 401(k).

With the 10-year bond yield languishing below three percent, it would be difficult to live on this income, unless you have sufficient bond holdings or other avenues of income, like my dad’s pension. Having a more frugal or cost-conscious lifestyle also helps for many in retirement.

Yet the one area that I feel has been extremely positive for investors over the past five years is the dividend paying stocks that provide far higher yields and preferred tax treatment versus bonds. My dad may not be open to dividend paying stocks, but it makes sense for many other investors.

In reality, the Dow Jones and dividend paying stocks have returned some impressive capital gains and income over the past years. I expect this to continue in the current investment climate, where the stock market is favoring less risk.

Take a look at the Dow Jones Industrial Average (DJIA), which is slightly in positive territory, but at the same time, laying out income via dividend paying stocks.

The income stream has also been inviting with the average dividend yield on the 30 Dow blue-chip dividend … Read More

Why the Chinese Economic Slowdown Matters

By for Profit Confidential

Chinese Economy to See Black Swan Type EventUnderstanding the economic slowdown in the Chinese economy is very important because not only does it impact American companies doing business there, but what happens in the Chinese economy—now the second-largest economy in the world—affects the global economy.

While media outlets tell us the Chinese economy will grow by about seven percent this year (30% below the 10% the economy has been growing annually over the past few years), the statistics I see point to much slower growth.

In February, manufacturing activity in the Chinese economy contracted and hit an eight-month low. The final readings on the HSBC Purchasing Managers’ Index (PMI) for February showed manufacturing output and new orders declined for the first time since July of 2013. (Source: Markit, March 3, 2014.)

And there are other troubles. The shadow banking sector in the Chinese economy shows signs of deep stress, but we don’t know how much money is really on the line here. China keeps much of its real economic news to itself, but we do hear how firms that are involved in the sector are defaulting on their payments.

And the Chinese currency, the yuan, keeps declining in value compared to other major world currencies. The Wisdom Tree Chinese Yuan Strategy (NYSEArca/CYB) is an exchange-traded fund (ETF) that tracks the performance of Chinese money market instruments and the yuan compared to the U.S. dollar. Look at the chart below:

WisdomTree Dreyfus chinese Yuan fund ChartChart courtesy of www.StockCharts.com

Since the beginning of February, the Chinese yuan and Chinese money market instruments have been showing signs of severe stress, largely unnoticed by mainstream media and economists.

There is no doubt in my mind … Read More

The Opportunity Coming to the Luxury Retail Stocks

By for Profit Confidential

The Pros and Cons I See in the Retail Sector Right NowWe all know how bad this winter has been so far. The harsh weather across the majority of the country has impacted jobs growth, commerce, housing, and consumer spending.

Of course, with the spring season on the horizon, we’ll soon see if the weak economic metrics mentioned were really an aberration due to the weather—or a sign of further slowing to come.

From what I can tell right now, we are definitely seeing some growth issues in the retail sector that have been attributed to the winter weather. The Home Depot, Inc. (NYSE/HD) reported a somewhat flat quarter, as did Lowes Companies, Inc. (NYSE/LOW). However, I understand why they’ve reported flat numbers—it’s winter; who wants to renovate or build when it’s so cold outside?

Bellwether Wal-Mart Stores, Inc. (NYSE/WMT) is also struggling to attract consumers to its doors. The global retailer delivered flat sales and earnings growth in its fiscal 2014; revenues grew a mere 1.6%, while earnings growth was not much better at an even two percent. Clearly, we are seeing some hesitancy in consumer spending and the retail sector.

The winter-related turmoil is not confined to just one area, though; it has impacted many retailers. However, the luxury side appears to be faring well, with excellent growth still at Michael Kors Holdings Limited (NYSE/KORS). This luxury retailer is providing staggering growth despite the sluggish retail sector. (Read “Stock Falling, but Rich Still Spending; My Top Luxury Stock Play.”) Clearly, the more affluent part of the masses continues to do very well, especially with the continued advance in the stock market, which has produced many new millionaires…. Read More

The Great Squeeze Play

By for Profit Confidential

The Growing Disparity Between Corporate Profits and WagesAs more and more public companies warn about weak fourth-quarter corporate earnings reports, quite a number of them are resorting to the use of words like “corporate restructuring” or “cost cutting.” At the very core, these cost-cutting measures mean reducing the number of employees working at these companies.

Let’s face the facts: companies on key stock indices are struggling to keep revenue and profits rising. The share buyback “thing” is getting old (after all, how much money do these companies have to throw at stock buybacks?), so to show better corporate earnings, reducing work forces is the easiest thing to do.

Wal-Mart Stores, Inc. (NYSE/WMT) says it plans to lay off 2,300 assistant managers and hourly employees at its Sam’s Club stores. (Source: CNBC, January 24, 2014.)

Abbott Laboratories (ABT) recently let go an unspecified number of employees at its Lake County headquarters. In the conference call to investors about its fourth-quarter corporate earnings, the CFO of the company simply said, “[the company] will take further actions to reduce out expenses… get our support structure at appropriate levels.” (Source: “Abbott Laboratories launches round of layoffs,” Chicago Tribune, January 28, 2014.)

And as I told you last week…

Intel Corporation (NASDAQ/INTC) said it will be reducing its workforce by 5,000 this year. Here’s what the company spokesman, Chris Kraeuter, had to say: “This is part of aligning our human resources to meet business needs.” (Source: “Intel to reduce global workforce by five percent in 2014,” Reuters, January 17, 2014.) Intel had flat fourth-quarter 2013 corporate earnings.

Hewlett-Packard Company (NYSE/HPQ), another major company in the key stock indices, is taking a … Read More

Top Stocks for Investors in an Uncertain Retail Market

By for Profit Confidential

How to Profit from an Uncertain Retail MarketInvestors were happily greeted with a surprise on Tuesday after the reporting of better-than-expected retail sales numbers that suggest the consumer spending market may be alive and well after all.

In December, the headline retail sales reading jumped 0.2%, which was above the Briefing.com estimate calling for a flat result. Even after adjusting for the volatile auto sales, the core retail sales reading surged 0.7% compared to the 0.4% consensus estimate.

The results offer some encouragement for spending this year in the retail sector and were much needed, given the recent downward guidance from several retailers.

Now, don’t get too giddy and go out and buy retail stocks at random. It’s not that easy. Investing in retail stocks at this time requires careful thought and evaluation. But with the right investments, there’s some money to be made in the retail sector.

The National Retail Federation also reported some encouraging numbers for the retail sector. Excluding auto, gas station, and restaurant sales, retail sales advanced 3.8% in November and December.

Sounds good on the surface, but there may be some underlying issues surfacing in the retail sector. About 25 of the 29 retailers that issued earnings guidance, unfortunately, offered a negative outlook. (Source: O’Donnell, J., “Holiday sales paint mixed picture for retailers,” USA Today, January 14, 2014.)

The stats put forth are non-conducive to a rally in the retail sector and, in fact, represent a troubled retail climate that is facing lower income from middle-class consumers.

Even the discounted retail sector area is showing some weakness in growth. Family Dollar Stores, Inc. (NYSE/FDO) offered a soft tone in its outlook … Read More

Top Market Sectors for 2014

By for Profit Confidential

Transports in 2013 Financials in 2014We won’t really get into the heart of the fourth-quarter 2013 earnings season until late January into early February. Smaller companies typically take longer to report, as they don’t have the large accounting departments that blue chips have.

I’ve noticed that quite a number of Wall Street research analysts have been boosting their 2014 full-year earnings expectations. They’re playing the same old game of cat and mouse with corporations and research analysts. Corporations always want to “outperform” if they can, so they deliberately keep their outlooks pretty conservative.

Companies getting a boost to their full-year earnings outlooks include: Wal-Mart Stores, Inc. (WMT), Microsoft Corporation (MSFT), Colgate-Palmolive Company (CL), Oracle Corporation (ORCL), E. I. du Pont de Nemours and Company (DD), Exxon Mobil Corporation (XOM), and Verizon Communications Inc. (VZ). Even Intel Corporation (INTC) is having its earnings outlook nudged higher by the Street for several upcoming quarters, including all of 2014.

According to FactSet, eight out of 10 S&P 500 market sectors are expected to report an increase in fourth-quarter earnings; these sectors are led by a strong expected gain in financials, followed by the telecom and industrial sectors. Energy is expected to produce a decline, comparatively.

While revenue growth from financials should be lackluster to negative on a comparative basis, a strong expected gain in earnings will be market-boosting news. Countless financials have been doing very well on the stock market since last November.

Over several of the last quarters, companies reported they were able to increase their selling prices without materially affecting demand. Sales growth has been a combination of increased volumes and rising prices.

Extreme monetary expansion … Read More

Small Pullback in Money Printing = Big Spike in Interest Rates?

By for Profit Confidential

Yield on 10-Year U.S. Treasury Doubles in Less Than Two YearsQuietly, without much fanfare or news, the bellwether 10-year U.S. Treasury hit a yield of 2.9% this past Friday—double what it yielded in June of 2012. (Source: Treasury.gov, last accessed December 20, 2013.)

Yes, the Federal Reserve only slightly pulled back on its money printing program and interest rates are already spiking.

And the standard 30-year mortgage rate hit 4.52% last week, up from 3.35% in November of 2012. Mortgage rates have increased by about a third in one year’s time. (Source: Freddie Mac web site, last accessed December 18, 2013.)

In the statement issued by the Federal Reserve last week, it said, “Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month.” (Source: Press Release, Federal Reserve, December 18, 2013.)

In other words, the Federal Reserve will continue to print $75.0 billion a month in new paper money as opposed to the $85.0 billion a month it used to print. If the Federal Reserve continues to print $75.0 billion a month through the year 2014, its balance sheet will grow by another $900 billion. Yes, by the end of 2014, we will be looking at a Federal Reserve balance sheet that shows close to $5.0 trillion in newly created money on it.

I’d like to end this year’s last editorial issue of Profit Confidential by communicating my most important message of the year.

All this printing of … Read More

Discount Merchandisers Facing Earnings Squeeze in 2014?

By for Profit Confidential

What Hurdles Discount Merchandisers Face in New YearI always want to know what Costco Wholesale Corporation (COST) has to say about its business. It’s a great benchmark stock and a barometer on spending.

The company’s latest quarter produced earnings that came in slightly below consensus. The great thing about this business is the membership fees. They are pure gravy and go a long way in padding the company’s bottom line.

In its fiscal first quarter of 2014 (ended November 24, 2013), the company’s sales grew five percent to $24.5 billion. Comparable store sales in the U.S. market grew three percent; international sales grew one percent. Excluding gasoline and foreign exchange (which the company always reports), U.S. comparable store sales grew four percent, while international sales grew six percent.

Membership fees actually came in pretty solid, growing to $549 million in the most recent quarter compared to $511 million during the same time last year.

Total quarterly earnings were $425 million, or $0.96 per diluted share. This compares to $416 million, or $0.95 per diluted share. Dividends paid grew to $0.31 a share, up from $0.275 per share, comparatively.

Costco’s shares sold off slightly after reporting its numbers. The company is in a solid financial position, but there has been a softening of results from other merchandisers.

Costco’s share price has been on a tear the last several years, but this is the second small crack in the company’s quarterly reporting, and I find it material. (See “Costco Membership Drop an Irksome Sign of Consumer Pullback.”) Costco’s five-year stock chart is featured below:

Costco Wholesale Corporation Chart

Chart courtesy of www.StockCharts.com

The bright spot in Costco’s latest quarter was … Read More

The Stock That Will Perform the Best as Consumer Spending Pulls Back

By for Profit Confidential

Stock That Will Perform the BestThe objective of Black Friday shopping for consumers this year was simple: find the best discounts in the retail sector. And while discounts seem to be everywhere, consumers are more focused on saving a dollar. There will surely be some sad retailers in the retail sector this holiday shopping season.

The retail sector will likely face some hard times that could get worse as we move through the final two weeks of the key shopping season prior to Christmas.

While the likes of Wal-Mart Stores, Inc. (NYSE/WMT), Target Corporation (NYSE/TGT), and Kohls Corporation (NYSE/KSS) struggled to attract shoppers, discounter Dollar General Corporation (NYSE/DG) reported a strong fiscal third quarter that supports why I favor the discounters in the retail sector. (Read “What the Changing of the Guard at Wal-Mart Means for the Stock.”)

Discount retailers like Dollar General will likely continue to perform well and attract customers, since the economy continues to appear fragile, especially in the jobs market. And even as the economic renewal picks up, I still sense the discount retail sector will continue to fare well.

In the case of Dollar General, the fiscal third quarter (ended November 1, 2013) showed net sales jumping 10.3% year-over-year to $4.38 billion, up from $3.96 billion in the year-earlier fiscal third quarter. The key same-store sales metric jumped 4.4% year-over-year.

The company reported adjusted earnings of $231 million, or $0.72 per diluted share, in the third quarter, up 10% from $210 million, or $0.63 per diluted share, in the comparative quarter.

And while Dollar General is up 21.4% over the past 52 weeks as of December 5, … Read More

Best Buy’s New Strategy a Buying Opportunity?

By for Profit Confidential

stock analysisThe sector that will be the topic of focus for the stock market over the next month is, of course, the retailers as we march on from Black Friday and Cyber Monday toward the key holiday shopping season.

To tell the truth, I’m not much of a shopper. I hate going to the malls and fighting the congestion of other shoppers scrambling for deals, especially on the crazy shopping days, like Black Friday.

I did, however, happen to venture out to Best Buy Co., Inc. (NYSE/BBY) recently and noticed the store looked fresh, the workers were energetic and eager to help, and there were excellent discounts.

Now I must admit that based on my stock analysis, I really believed Best Buy would have been privatized by now, especially following the previous attempt to do so by former CEO and founder Richard Schulze. Now, the company is under the leadership of Hubert Joly, who has had decades of success working at Electronic Data Systems Corporation, Vivendi Universal, and Carlson Wagonlit Travel. Joly, who took hold of the reins in August 2012, appears to be getting Best Buy back on track, as my stock analysis suggests.

This former darling of Wall Street and the “Best of Breed” in electronic retailing has been hurt by the rise of fierce competition from both physical and online rivals, including Wal-Mart Stores, Inc. (NYSE/WMT) and Amazon.com, Inc. (NASDAQ/AMZN), according to my stock analysis. The threat of extreme competition and the intense pressure on margins has forced Best Buy to rethink its strategy, based on my stock analysis.

Armed with an aggressive pricing strategy and offensive attack, … Read More

What the Changing of the Guard at Wal-Mart Means for the Stock

By for Profit Confidential

Wal-MartWal-Mart Stores, Inc. (NYSE/WMT) is signaling its intent on conquering the global low-cost (discount) retail market following the announcement that Doug McMillon will become the new CEO and president of the world’s biggest and most influential retailer, boasting nearly $500 billion dollars in annual sales and employing over two million people worldwide.

The change at this time makes sense as Wal-Mart tries to expand its operations globally, especially in China. McMillon was a fitting candidate, as he had been CEO of Wal-Mart International and understands what it takes to grow a company internationally.

Wal-Mart operates around 11,096 stores in 27 countries worldwide. Sales in the United States account for the vast majority of its total sales stream, but international sales, at $33.1 billion in the fiscal third quarter, accounted for nearly 25% of total sales. This means that there are opportunities here.

While Wal-Mart is the “Best of Breed” and a buying opportunity in the discount retail sector, the company’s real underlying potential growth lies in its ability to expand its international sales, which is where McMillon comes in.

Wal-Mart Stores Chart

Chart courtesy of www.StockCharts.com

In the fiscal third quarter, operating income rose 5.8% in the U.S., but saw eight-percent growth in its international stores on a constant currency basis. The profitability of its international stores indicates why the expansion in places such as China, Brazil, India, and other emerging markets is so critical.

Wal-Mart initially ventured into China in 1996 and is currently operating Supercenters, Sam’s Clubs, and Neighborhood Markets. The retail footprint comprises about 401 units in China, with 356 under the Wal-Mart Supercenter operation. Stores are situated in … Read More

OECD Predicts China #1 Economy by 2016; Consumer Spending to Soar

By for Profit Confidential

consumer spendingGet ready for the massive consumer push by the Chinese over the upcoming years and decades as the government strives to drive the economic engine via consumer spending.

The modification to the current one-child policy, which I recently discussed in these pages, will help create an even bigger middle class in the country that will drive up the demand for goods and services. (Read “China’s Expected Baby Boom a Boon for U.S. Business.”)

The Organization for Economic Cooperation and Development (OECD) has become more bullish on China, and predicts Chinese gross domestic product (GDP) growth will rise to 8.2% in 2014, driven by a rise in domestic consumer spending. (Source: “OECD sees China growth accelerating in 2014,” China Daily, November 20, 2013.) The OECD even goes as far as to say the Chinese economy could surpass the U.S. economy to become the world’s biggest economy by 2016. While this is faster than I expect, it’s clearly not impossible, given the rise in income levels and spending.

The middle class in China will drive the economic engine of the country, unlike what we are seeing in America with the declining spending prowess of the middle class. In fact, what we are seeing in China is similar to the power of the U.S. middle class that drove the Industrial Revolution in the late 1800s and early 1900s.

If China can emulate what happened in the U.S. then, there could be some golden years ahead for the Chinese economy.

To play the expected rise in consumer spending in China, which is increasing at double-digit rates and is likely to continue … Read More

Early Signs Point to Upcoming Storm for Retail Sector This Holiday Season

By for Profit Confidential

Retail SectorIt’s that time again. I haven’t heard the holiday music ring through the stores and malls yet, but it‘s coming, and I can tell you that retailers across America are nervous.

Black Friday is less than two weeks away, and I sense there’s increasing nervousness in the retail sector. For some, this weekend of spending accounts for over 50% of annual sales.

Macy’s, Inc. (NYSE/M) reported a strong fiscal first quarter in which it beat the Thomson Financial earnings-per-share (EPS) consensus estimate by $0.08 per diluted share or 20%. But while Macy’s offers investors some hope, the good news was short-lived, as the stock’s results may have had more to do with the company’s own success than a strong retail sector.

Wal-Mart Stores, Inc. (NYSE/WMT) and Kohls Corporation (NYSE/KSS) followed suit with soft reports that left investors worried about the strength of the holiday shopping season.

In the case of Wal-Mart, the world’s largest retailer reported a 0.1% decline in comparable U.S. store sales (without fuel) for the 13 weeks ended October 25, down from 1.7% growth a year earlier. For the 39 weeks ended October 25, Wal-Mart saw its U.S. sales contract by 0.4%, versus 2.4% growth in the year-earlier period. The result from Wal-Mart raises some red flags for the retail sector as we head into what is the most critical shopping time of the year.

Mike Duke, president and CEO of Wal-Mart, noted in the company’s quarterly report that the retail sector is “competitive.”

Wal-Mart also doesn’t appear to be too optimistic going forward and that makes me nervous, since the company is a good barometer … Read More

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