A Tale of Two Retails
The coronavirus has dealt damage to financial structures major and minor, from small businesses to huge conglomerates.
Companies with plunging stock prices, like airlines, are being kept afloat through drastic government intervention, including a two trillion dollar stimulus bill, 25 billion of which is direct aid.
Financial distress is felt in many businesses, particularly consumer retail. In this era of social distancing, companies such as TJ Maxx, Marshalls and HomeGoods (all under the parent company TJX) have begun furloughing workers as stores proceed to temporarily close. CEO Ernie Herrman and other executives are expected to take a 20-30% base salary reduction, in an attempt to preserve capital.
Investment banking analysts have ticketed TJX as one of the riskiest companies in terms of cash return, suffering under a slow growth environment. Its rising debt level and weakening profitability is reflected in its 3-month stock chart, which, in late February, peaked at its highest price-per-share in three years, selling at $63.99. A month and an outbreak later, that price point has dropped in half to a measly $36.76 per share.
Many other companies are having similar financial experiences. Kering, the parent company of renowned luxury brands Gucci, Saint Laurent, and Balenciaga, started off the year strong, reaching $766.65 in early-mid January, then declined sharply in mid-March to about $450.
Chinese shoppers account for one-third of the luxury products sold globally; economic outlook certainly doesn’t bode well for any luxury giant when traffic at designer stores in mainland China’s infected areas is down by 80-90%.
88% of Kering’s suppliers are based in Italy as well, and cornerstone regions for manufacturing like Marche and Tuscany have seen increasing pandemic cases week by week.
While it may be premature to focus on the negatives in these dynamic times, we can still find plenty of reasons to focus on the positives.
Costco saw their March sales jump by nearly 12% due to consumer demand for basic items. While stay at home orders are in force, consumers are looking to Costco's value proposition for large amounts of discounted goods that are needed throughout the home.
Beating the market and emerging as a leader of retail is Dollar General, holding a YTD performance of +8.5%. Identified as having low debt (Debt/Equity ratio of 0.4) and a logical valuation, Dollar General is exactly the type of defensive business that turns tragedy to triumph.
With budget-conscious consumers cutting spending and flocking to more affordable goods providers, Dollar General CEO Todd Vasos is putting the cherry on the sales sundae by offering 10% discounts to all medical personnel, first responders and National Guardsmen. Rather than furloughing workers, DG (and others like CVS) are planning to hire up to 50,000 employees in the near future.
With 75% of the US population within 5 miles of one of Dollar General's 16,300 nationwide stores, investors have clearly identified the convenience store as a profitable pick with long term growth potential (and a 5-year EPS growth rate of 10.6%). Its price per share is up from an initial late-March dip of $137.23 to $171.57 to-date.
Not only are convenience stores receiving a much needed sales boost, but the food packagers themselves are also raking in profits. Canned soup, pasta, and granola bars are among the categories that experienced the 10-20% percent highly significant pantry-loading-related sales growth.
Campbell's Soup, General Mills and Post Holdings are some of the household brand names that are expected to outperform the S&P 500 index in this COVID-19 downturn, as consumers are discouraged or even forbidden to eat out. Although Campbell's hit a yearly peak of $53.84 in share price back in mid-March, analysts predict that demand will eventually level out in the weeks ahead; the stock currently sits at a price of $48.50.
Even in these tough times, some companies will continue to prosper and are good investments.
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Written by William Lu, Edited by Thomas Braun & Alexander Fleiss