2 for 1 Special: Wal-Mart and Best Buy

Includes: BBY, WMT, XRT
by: Wall Street Strategies

By Brian Sozzi

Calling It Like I See It on Wal-Mart

After careful consideration, I downgraded my recommendation on Wal-Mart (NYSE:WMT) shares to sell from hold and revised the price target to $50.00 from $52.00. I acknowledge that this is more of a short-term call on the stock. Since Black Friday, Wal-Mart shares have quietly underperformed key competitors and the broader retail sector as measured by the S&P Retail Index (RLX). This has not gone unnoticed on the part of yours truly, and arises despite healthy levels of consumer activity at most retail stores and online for the holiday season to date.

Share price performance since Black Friday:

  • Wal-Mart: flat
  • Target (NYSE:TGT): +3.1%
  • Costco (NASDAQ:COST): +5.18%
  • S&P Retail Index: +1.2%

My rating downgrade is the combination of several observations made during my outrageous amount of store visits this holiday season. They include:

  1. Target's 5% RedCard reward program led to a significant step up in the comparable store sales (comp) growth rate in November (when program began; +5.5% from +1.7%) as consumers utilized the savings to purchase groceries and discretionary categories. The acceleration in comp suggests share loss for Wal-Mart.
  2. Best Buy's (NYSE:BBY) 3Q earnings miss (more on this on the bottom) and below consensus 4Q guidance shed light on continued challenges for big box retailers in consumer electronics, such as videogames (I am seeing prices come down on current generation console titles) and 52 inch and lower plasma and LCD TV models that have become very price competitive this holiday season. Costco has also noted that units of these models have been sluggish, while Target is advertising aggressive "price cuts." In addition, where Best Buy had success in 3Q, mobile, is an underrepresented category at Wal-Mart outside of a limited selection of phones and Apple's (NASDAQ:AAPL) iPad. Electronics represent 13% of Wal-Mart's business.
  3. Improved comp trend by mid-tier department stores suggests consumers are buying discretionary apparel, a lost opportunity for Wal-Mart as it promotes a basics only strategy.
  4. I think issues that arose from the Project Impact initiative linger.

Is Best Buy, a Best Buy?

The third quarter operating results and fourth quarter outlook from Best Buy were tough to stomach for this retail stock aficionado. At this point, I think the stock is one to stay clear of despite many on the Street extolling the virtues of the stock's "compelling valuation." Near-term, the market is likely to be fixated on Best Buy's domestic market share loss, inventory bulge, and pressured average selling prices in plasma/LCD TVs and gaming. In turn, this will weigh on the P/E multiple afforded Best Buy shares.

Let me ask you, the intelligent investor; do you think Best Buy is a best buy (send me an email at brian.sozzi@wstreet.com with your thoughts) when considering the not so fun facts from the third quarter:

  1. Domestic market share loss.
  2. Negative customer traffic and average selling prices led to a -5% comparable store sales print.
  3. Consumers are balking at Best Buy's upper-tier TVs, such as 3D and HDMI enabled.
  4. Management commentary:

This isn't a year where people are going to come out and buy a new TV and a new tablet.

Disclosure: No positions