CWS Market Review – May 17, 2022

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Inflation Punishes Walmart

This week is when many retailers report their earnings. Retail companies often prefer a fiscal year that ends at the end of January. That way, the all-important holiday shopping season (November, December and January) is contained in just one quarter. That leads many retailers to have a Q1 that ends at the end of April which means we get their latest earnings reports about now.

As far as retailers go, they don’t get much bigger than Walmart (WMT). Walmart is so big that its earnings report is probably closer to the government’s report on consumer spending. To be honest, it’s probably a better gauge of how many middle-class and lower-middle-class folks are doing.

This morning, Walmart reported earnings of $1.30 per share. That badly missed Wall Street’s forecast of $1.48 per share. That’s an unusually large miss. It seems that inflation is having an impact on shopping habits.

Walmart actually topped Wall Street’s revenue forecast. For February, March and April, Walmart registered sales of $141.57 billion compared with estimates of $138.94 billion. E-commerce sales rose by just 1%. To give you an example of Walmart’s size, the company averages sales of $20,000 every second of every hour of every day.

Walmart is apparently having a shortage of store managers even though the position can pay more than $200,000 per year.

One bright spot is that Walmart raised its full-year sales forecast by a tad. Before, Walmart had been expecting an increase of 3% in constant currency. They bumped that up to 4%.

Walmart also said it expects earnings-per-share to fall by 1%. That’s down from the earlier projection of an increase in the mid-single digits.

Some people think that consumers are benefiting from Walmart’s higher sales and lower earnings, but that’s not what’s happening. Instead, Walmart’s shoppers are shifting to lower-margin options which is due to the resurgent inflation. For example, Walmart’s top category is groceries and that tends to be low margin compared with areas like apparel or electronics.

According to the Bureau of Labor Statistics, food costs are up 9.4% in the last 12 months. What’s happening is that shoppers are forgoing goods like electronics, so low-margin groceries make a larger impact on Walmart’s bottom line.

Walmart has over 5,000 stores and retail is a business that’s all about cost control. Walmart’s gross margins in the U.S. fell by 38 basis points, and operating expenses rose by 45 basis points.

Interestingly, Walmart became a national company during the inflation years of the 1960s and 70s. Sam Walton made the store synonymous with low prices. Walmart wiped out Main Street in many small southern towns, but it was dedicated to giving shoppers low prices.

Walmart’s CEO said that in the last quarter, the average ticket for customers increased by 3%, but they’re buying fewer items. Last year, the stimulus checks helped out, but that obviously wasn’t a factor this year.

Traders showed little mercy as shares of WMT got pounded in today’s trading. At one point, shares of Walmart were down close to 12%. Since Walmart is a member of the Dow, today’s trading also led the Dow to badly lag the S&P 500.

For its part, this morning, the government released its retail sales report for April and it showed a decent increase of 0.9%.

TJX (TJX) will report tomorrow before the opening bell. Wall Street expects 60 cents per share. I suspect there are a lot of folks expecting the worst because the stock has not been doing well. TJX is down over 25% this year and the shares just hit another 52-week low today. The shares are lower now than where they were before Covid.

The company was hit hard during the pandemic. Only recently has TJX started paying its dividend again and the last earnings report was not a good one. For its fiscal Q4, TJX made 78 cents per share which was 13 cents below estimates. Tomorrow’s report will tell us if TJX has regained its footing.

On Thursday, Ross Stores (ROST), one of our Buy List stocks, is due to report. Ross is often lumped together with TJX, but I think it’s the superior investment.

Ross handily beat its Q4 guidance although the retailer tends to be very conservative with its forecast. Ross has ambitious plans for the future. The CEO said that the company plans to grow the number of its Dress for Less stores to 2,900. That’s up from the previous forecast of 2,400. For dd’s DISCOUNTS, Ross now aims for 700 stores versus the earlier projection of 600 stores.

For Thursday, Ross sees Q1 earnings of 93 to 99 cents per share. That’s almost certainly too low. Wall Street isn’t buying that range either. The current consensus on Wall Street is for earnings of $1 per share. I think it will be even higher. It’s tough to stick by a stock that has done so poorly, but I have a lot of faith in ROST’s team. This is a good long-term stock.

Not all retailers are suffering. Today Home Depot (HD) said it beat expectations and the company raised its full-year guidance. For the quarter, HD made $4.09 per share. That was 41 cents more than expectations. Revenues came in at $38.91 billion. Wall Street had been expecting $36.72 billion. Here’s a revealing fact: Home Depot customers spent 11.4% more for each transaction but the number of transactions fell by 8.2%. That’s the impact of inflation.

Before, Home Depot said it was expecting slightly positive sales growth for this year and low single-digits earnings growth. Now they’re expecting sales growth of 3% and earnings growth in the mid-single digits.

It seems that high prices aren’t scaring off shoppers in all categories, and the home improvement sector is a vital one. Lowe’s (LOW) reports tomorrow.

The Battle for Spirit Airlines

I love a good bidding war. Sometimes I think modern Wall Street is too serene for its own good. It looks like we’re having some real drama in the battle to buy Spirit Airlines.

On Monday, JetBlue (JBLU) announced it’s going for a hostile takeover of Spirit Airlines (SAVE). Earlier, JetBlue had offered $33 per share for Spirit but Spirit’s board shot it down. Instead, Spirit is going with the offer made by Frontier Airlines (ULCC) which is in stock and cash.

This is where it gets interesting. JetBlue’s hostile offer is for $30 per share but they said the old $33 offer is still valid if JetBlue is willing to negotiate. In plain English, JetBlue is going over the heads of the board and making their case directly to the shareholders. That’s a bold move, but they have a point.

On Friday, shares of Spirit closed at $16.98. I’ll note without comment that Spirit’s ticker symbol is SAVE.

Under Frontier’s deal, Spirit shareholders will get 1.9126 shares of Frontier plus $2.13 in cash for each Spirit share they own.

Since Frontier made its offer, its stock has been going down. The lower share price has meant a lower merger price for Spirit. JetBlue knows that and is banking that the shareholders will nix the deal. Spirit shareholders are scheduled to vote on the deal on June 10.

At Frontier’s current share price, that works out to about $20 per share for Spirit. In other words, JetBlue is offering a hefty premium.

JetBlue’s offer is further complicated because the government regulators may not like it. Also, the flight attendants’ union just gave its approval to Frontier’s deal.

A little over a year ago, Frontier came back to the public market. The budget carrier sold 30 million shares at $19 a piece. It’s half that today.

From my view, I can’t help wondering why JetBlue is so anxious for this deal. When you’re too eager for a deal, it’s as if you’re admitting you don’t have much of a future. None of these companies is very profitable. JetBlue hasn’t had a positive quarter since 2019. In the end, I think Frontier will prevail but I don’t think any of the shareholders will prosper.

Airlines are a notoriously difficult industry for investing. It’s the only industry that was hurt by regulation and deregulation. There seem to be endless price wars that no one can win. At one point after 9/11, I recall that the entire combined history of civil aviation was a net profit loser. Even Warren Buffett took a bath with his USAir investment. Buffett later said that if a stockbroker had been at Kitty Hawk, he would have shot the plane down.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

Posted by on May 17th, 2022 at 7:29 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.