Hard Times Will Continue At These Iconic American Retail Plays

Includes: MCD, TGT, WMT
by: Bret Jensen


One of the hallmarks of the tepid post war recovery of the past five years has been the lack of wage growth at the lower end of the scale.

This trend has accelerated since the recession ended and is having a significant impact on areas of retailing that cater to these consumers.

Here are three American retailing icons that have borne the brunt of this "wealth inequality" and are likely to continue to do so.

"Give me your tired, your poor,

Your huddled masses yearning to breathe free,

The wretched refuse of your teeming shore.

Send these, the homeless, tempest-tost to me,

I lift my lamp beside the golden door!" - Excerpt from tablet in front of Statue of Liberty

"Wealth Inequality" is a big topic as we approached the 2014 mid-terms. One of the ironies of the past five plus years under a progressive pro-union administration is that this wealth inequality gap has actually accelerated from a trend that has been in place for over three decades and is mainly the result of an ever more connected world commonly known as "Globalization".

I wish I had the answers to help reverse the trend but it would likely involve choices and policies that neither party would embrace. Given this is not a political forum, let's take a look at this accelerating development and its impact on the market and on stocks.

Even with job growth at its highest levels since the recession ended June 2009, it is still weak compared to where it should be at this point in the business cycle. GDP growth is still stuck at a tepid 2% annual level in what continues to be the weakest post war recovery on record. To put in perspective, the average annual GDP growth coming off the nine previous post war recoveries have averaged over 4% for the four years after those recessions ended.

Even with this improved job growth, wages are barely keeping up with inflation and consumer spending at the lower and even middle income levels is under distress. Let's take a look at three huge American icons that have seen their stock prices go nowhere for two years while the rest of the market had a substantial rally.

McDonald's (NYSE:MCD) was in the news this week as the leading fast food restaurant chain in the world just reported its most dismal same stores numbers in a decade and 2014 could be the year the fast food purveyor could see its first full year sales decline since 2002.

Recently released monthly sales fell domestically by just over three percent on a same store basis in the United States as consumers that can afford it move up to the higher end fare at Chipotle Mexican Grille (NYSE:CMG) and as sales to less well healed consumers remain under pressure despite an extensive "value" meal menu.

Without a major revamp to the restaurant's offerings or significant improvement in the health of the low end consumer, it is hard to see the prospects for McDonald's getting better domestically in the near future. The shares do pay a 3.2% dividend but also go for approximate 17 times forward earnings and basically no earnings or revenue growth on the horizon; I would continue to avoid the shares as investors are better off picking a utility stock with a slightly better dividend yield, the same earnings multiple, and even better growth prospects.

Wal-Mart (NYSE:WMT) has become the largest retailer in the world by offering low prices and a wide selection to the masses. This model has worked for over three decades but has stumbled recently. The giant retailer has posted five straight quarters of declining same store sales growth which has led to a recent management shakeup.

With continued and increasing competition from Amazon (NASDAQ:AMZN), consolidation in the dollar store segment with Dollar Tree (NASDAQ:DLTR) and Family Dollar (NYSE:FDO) merging to create a more efficient competitor, as well as a saturated market; it is hard to see how Wal-Mart can achieve any decent growth in this environment. Wal-Mart does pay a 2.5% dividend but earnings should be flat this year and the big discounter is a huge target for unions and activists as well. I see no compelling reason to own the shares at over 14 times this year's projected earnings.

Target (NYSE:TGT) is the second biggest discounter in the space and is struggling even more than Wal-Mart right now. It has been hit by the same lack of wage growth at the lower end of the scale as well as a disastrous foray into Canada resulting in billions of dollars in losses.

Target has missed earnings expectations for two of the last three quarters and consensus earnings estimates have come down significantly for FY2015 over the past three months. The company also recently lowered forward guidance.

The stock does pay a 3.6% dividend yield but the retailer is struggling to achieve even two to three percent annual revenue growth. Even with the recent decline in its stock, the shares still go for over 16.5 times this year's consensus earnings estimates.

Optimizing investment performance is as much about the stocks and sectors one avoids as it is about the equities one purchases for their investment portfolio. Until the economic environment improves for the lower end consumer or "huddled masses" I would stay away from the retailers that cater to this demographic. These stocks have been "dead money" for two years now, and I do not see anything on the horizon that will change their short term prospects.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.