Rob Black's Retail Stock Report (MCD, PEP, SBUX, TLB, WMT)

Includes: MCD, PEP, SBUX, TLB, WMT
by: Rob Black

PepsiCo (NYSE:PEP) has been taking Gatorade to the next level, having developed a further understanding of the hydration-reinvigoration “need states” and deftly segmented the brand to address those growing opportunities.

PepsiCo took control of the Gatorade brand in 2001, with its acquisition of Quaker Oats. With Gatorade, PepsiCo has built on Quaker’s success, nearly doubling volumes in the last five years, from 1.5 billion unit cases to nearly 3 billion. PepsiCo’s success with the Gatorade brand derives in no small part from its increased segmentation of the brand, to satisfy the re-hydration/reinvigoration “need state” of a broad spectrum of consumers. Gatorade Rain, Frost, X Factor, and Fierce are all targeted at distinct subgroups. X-Factor and Fierce skew younger, with a bolder taste. More importantly, Propel fitness water addresses the calorie concerns that some consumers have with the Gatorade brand, and has helped draw females, in particular, into the category.

At the Wal-Mart (NYSE:WMT) Stores division (66% of total company sales), operating income increased over 20% on a 10% sales gain marking the second consecutive quarter where operating income growth at Wal-Mart Stores outpaced sales growth. Total inventory increased 2.7% in 1st quarter 2006 on a 12.3% rise in net sales, significantly better than the stated goal of growing inventory at ½ the rate of sales growth. Analysts do not believe future inventory reductions will be of the same magnitude, but WMT should see benefits from this clean-up effort on a year-over-year basis for the next few quarters.

Operating margins at the International division declined 60 bps, worse than our estimate for a 30-bp decline. We note that two of the largest countries – ASDA (U.K.) and Walmex (Mexico)– are on a March quarter and therefore WMT’s 1Q report does not capture the benefit of April (which was helped by the Easter shift).

Citigroup initiates McDonalds (NYSE:MCD) with a Buy and a $41 target.

Citigroup initiates Starbucks (NASDAQ:SBUX) with a Hold and a $40 target.

Talbots (NYSE:TLB) reported earnings of $27.4 million down from a year-ago profit of $34.5 million. Sales edged 1% higher in the latest three months to $453 million from $446.5 million in the same period a year earlier. Same-store sales rose 0.9% in the quarter. Talbots predicted a weak outlook for the second quarter reflects weak sales from its J. Jill Group operations and an expectation for incremental Talbots brand markdowns in the period due to soft sales and the shift of a promotional event to the first quarter from the second.