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'Tough Love Wendy' writes:

Macke-

I watched your show (on Friday) and I'm thinking that you're letting your emotional angst toward Wal-Mart (WMT) get in the way of looking at the company objectively.  The same is true in reverse for Target (TGT).  You're just bent on the fact that Target is a much better company than Wal-Mart.  Perhaps it is but you're too emotional about it.  Anyway, if you get a chance to watch Friday's show again you'll see what I mean.  You have been riding Wal-Mart for so long that anyone who reads you on MV knows how much you despise the company.  The stock has now had a pretty good run and you're not willing to give the company any credit.  You should.  It would make you more likable on TV.

Also, this article is MUST READ on CostCo (COST).  To me, after reading this, I don't know why anyone would be invested in Target, Wal-Mart or any of the other retailers.  CostCo CEO Jim Sinegal is a genius.  I don't own the stock but am thinking of buying it next week.  Please read the article.  Even though I know you're the "retail expert" you'll actually learn something from this piece.

Tough,

That was you watching on Friday night?  At 8pm on a weekend night, and with how much Fast Money has been jerked around over the last month, schedule wise, I pretty much assumed I was only talking to the camera crew and shut-ins looking for Deal or No Deal

For those who missed the show, the context of my latest televised Wal-Mart screed was in response to Guy "Uppity" Adami's assertion that Target was a short here.  My reply, paraphrased as unemotionally as possible, was that Target is the best discounter going at this moment.  While the retailers as a whole have had such a huge run that I was willing to entertain the notion of shorting some of them, it seldom makes sense to go after the industry operational leaders.  Because, as you thoughtfully observed, I'm in the habit of beating Wal-Mart like a government mule, I added that those looking to short retail would be better off shorting WMT.

I'm probably guilty of personal echolalia on my beating of Wal-Mart but I stand behind the idea without any angst whatsoever.  While Wal-Mart's stock has run without me on-board (a point I've conceded here and elsewhere), the company continues to underperform on a sales basis.  If you're playing in retail stocks, Wal-Mart's feeble Same Store Sales and slowing domestic expansion matters in a huge way.  Since you sort of asked, I'll explain why.

Whatever you think of the strength, or lack thereof, of the US consumer, sales don't just disappear when Wal-Mart fails to make them.  Consumers just take their wallet and go to a different store.  When any retailer is performing poorly it helps the guys competing with them.  When the biggest retailer in the world can't keep pace with GDP, inflation or any other measure of growth you care to use, it creates an opportunity for competitors to grab sales, share and glory.

Wal-Mart will do $1 Billion per day in sales this quarter, just by keeping up with last year.  If the company were hitting on all cylinders they would be growing that number by 5%, give or take, off their existing store base.  When Wal-Mart comes in flat on SSS it creates something like $50,000,000 per day in revenues formerly regarded as belonging to WMT available for other retailers to steal.  Keeping our math strictly back of the envelope, that's $4.5 billion in fourth quarter sales theoretically free to other retailers simply because Wal-Mart is generating same-store-sales just north of 0 rather than slightly above the 5% Mendoza line for performing retailers.

Now, some of those sales may be a function of a tapped consumer.  Some of those sales may be in totally discretionary items that go unpurchased because Wal-Mart couldn't make their shoppers feel impulsive enough to spend it in WMT stores.  What's more, as the hypothetical pertains to Target in particular, maybe the sales don't stay in the discount category but, instead, go to specialty shops, the Internet or wherever.

But I'd be willing to bet that Jim Sinegal figures a big chunk of that $4.5 Billion should be going to CostCo.  I'd further wager that Bob Ulrich at Target thinks his operation should be gathering a good portion of what Wal-Mart is spilling as well.  CostCo and Target each did about $17 Billion in revenues in the fourth quarter of '05, compared to Wal-Mart's $89.9 billion.  CostCo and Target don't have to take every sale Wal-Mart is missing to meaningfully improve their numbers for this year; they just need to grab their fair share.

That's why it matters when Goliath stumbles; because it means huge opportunity for all the would-be Davids out there fighting him.  And that, not my loathing, is why I keep picking on Wal-Mart.  Everyone except Wal-Mart benefits from a weakened Wal-Mart and, with some notable exceptions, I don't think the general media is picking up on the real story.

Investment Take-Aways:

  • If you must short retail, stick to the companies losing share or treading water.
  • Wal-Mart (est. $320b in '06 sales) and K-Mart/ Sears (SHLD, $50b '06 sales) turning in flat and negative comps, respectively, makes up for a decent chunk of consumer weakness (to whatever extent that has manifested itself to date).
  • Stock rallies unsupported by fundamental improvement are invitations to exit long positions or consider shorts.
  • I will remain unlikable on TV at least as far as this point is concerned (and probably in general.
  • Tune in to Minyanville on Thursday morning to see the Same Store Sales Round-Up.

The Macke Standings: Retail Sector Leaders

Discount:                       Target
Club Stores:                  Cost-Co
Electronics:                    Best Buy (BBY)
Apparel Specialty:        Guess (GES)      
Childrens Apparel:       Gymboree (GYMB), Children's Place (PLCE)
Grocery:                          Safeway (SWY), SuperValu (SVU)

I don't own all of these and I'm not advising anyone to get long them; not ever and certainly not after the rally we've seen over the last few months.  My two-fold assertion is that a) the above companies are, in terms of what I'm seeing in the (crowded... very crowded) malls, are doing the best job of pleasing their customers from an operational perspective  and b) you're better off shorting the companies who the above group is beating in the marketplace.

P.S. I love CostCo and, like Tough Wendy, am an opportunistic buyer of the stock.  Check out the article linked above!

Source: When Goliath Stumbles: Wal-Mart, Target and Costco