No. of Recommendations: 0
Dollar General gets its latest bearish view as HSBC says its least favorite of 7 retailers
2023-09-25 12:42:59.124 GMT
By Ciara Linnane
(MarketWatch) -- Retailers need a smart 'offline-to-online' strategy to
succeed in the postpandemic worlds, says HSBC
HSBC became the latest house to issue a bearish view of Dollar General, naming
it least favorite among a group of seven U.S. retailers it initiated coverage
of in a new report on Friday.
Analysts named Walmart Inc. (WMT) their favorite and assigned it a buy rating,
but slapped Dollar General (DG) with a reduce rating, equal to sell. It
assigned Costco Corp., Home Depot, Kroger's Inc., Lowe's Inc. and Target Co. a
hold rating.
The pandemic greatly accelerated digital sales, which now account for about
15% of total retail sales in the U.S., up from about 10% before the pandemic
broke out in 2020.
HSBC is expecting that trend to continue with online purchases becoming the
main driver of retail sales and growing at a faster pace than
bricks-and-mortar sales. At the same time, offline sales will remain the most
relevant channel for most players, accounting for about 80% of sales by 2027.
"In our view, retailers with the best offline-to-online, or O2O, strategies
will be the leaders in this environment," said analysts Daniela Bretthauer and
Guilherme Domingues.
The analysts reviewed the seven companies against the background of the
postpandemic world, in which consumers appear to be valuing experiences over
discretionary goods purchases. That's based on the amount of travel -- and
especially international travel -- that was recorded this summer, the first in
which people were comfortable flying long distances again.
"With mobility essentially back to normal post COVID-19 disruptions, spending
on travel and experiences is gaining momentum at the expense of discretionary
spending on physical goods, accounting for a higher share of total consumer
expenditures, as reported in the U.S. Census Bureau for economic data," the
report said.
Some discretionary goods, such as furniture, building materials and
electronics, enjoyed "pulled-forward" demand in 2020, and are now experiencing
volatility. The BEA has found the personal savings rate is below prepandemic
levels, suggesting householders are relying on excess savings to support
consumption.
As high inflation squeezes household budgets, consumers are spending more
carefully, but of course, groceries remain a priority.
That makes Walmart a top pick for the analysts, who praised its "superior O20
strategy, sheer size, and attractive growth story with operating profits
growing at a faster pace than sales."
"Size matters in retail," they wrote. Walmart snaps up one in every four U.S.
dollars spent on U.S. groceries, which is almost as much as Kroger, Costco and
Albertsons combined.
Dollar General, in contrast, is behind on digitization and is hurting from a
dearth of short-term drivers. The company has a strong value proposition as
the biggest discount retailer by store count in the U.S., but its exposure to
weaker consumer spending on discretionary goods call for a bearish view, said
the report.
Read also: Lower-income households 'are acting recessionary today.' JPMorgan
gives Dollar General its worst rating after company presentation
Costco's (COST) e-commerce strategy complements its warehouse business well
and its pricing is competitive.
"Shares appear fairly valued trading at a 2024e PE of 36x (10% premium to the
historical average), and we see few near-term catalysts," said the report.
Home Depot (HD) is a leader in the fragmented but large home-improvement
market, which is estimated to be worth about $1 trillion. It has a solid 020
strategy and delivered $50 billion in revenue and $6 billion in earnings in
the last three years.
See also: Dollar-store stocks slide and UBS says Chinese discount websites may
be their next challenge
"While we acknowledge Home Depot's distinct competitive advantages and
operational excellence, we think shares present a balanced risk/reward
return," the analysts wrote.
Kroger (KR), meanwhile, would be the third-largest U.S. food retailer if its
merger with Albertson's (ACI) goes through, but the timing and terms of any
deal remain unclear.
"Given that shares are trading in line with the historical sector average
andmerger uncertainties, we believe the stock is fairly priced," said the
report.
Lowe's is the second-largest home-improvement retailer in the U.S. after Home
Depot and it has returned $34 billion to shareholders in the last four years
for an average return on invested capital of 37%. However, "shares appear
fairly valued given that our target PE multiple is 6% below the average
multiple the stock traded at during the pandemic years."
Finally, Target (TGT) is one of the most iconic retailers in the U.S. with an
estimated 3% market share in 2022, the report said, citing Euromonitor data.
Read also: Retailers compete to be first to hold holiday sales in a bid to
spur flagging demand
But the analysts questioned whether its store-as-the-hub model is the best and
most profitable way to grow its 020 business.
"Higher exposure to discretionary (c60% of sales) categories and execution
risks keep us on the sidelines on Target shares," they wrote.
The Consumer Staples Select Sector SPDR exchange-traded fund XLP has fallen
4.6% in the year to date, while the SPDR S&P Retail ETF XRT has gained 0.5%.
The S&P 500 SPX has gained 16%.
-Ciara Linnane
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