Several large retailers, including Wal-Mart (WMT), Target (TGT) and Home Depot (HD) have posted similar results over the course of the first three quarters of 2010. In looking at the numbers behind the numbers, we have uncovered several significant trends including sub-sectors that drove the results of these three leading retailers, and just how significantly their supply chains continue to outperform the retailers themselves and the market overall. Wal-Mart's massive scale and market penetration in the U.S. provides it with unparalleled insights into the state of the economy ahead of most other research entities. With that in mind this giant's supply chain retains a higher degree of importance.
Given the low turnover of Wal-Mart suppliers and the diligence the company invests in selecting its vendors, Wal-Mart Suppliers are among the best performing U.S. equities. This also holds true of Target and Home Depot suppliers.
With regard to our sector analysis, we believe that positive trends will continue for suppliers in the Revere Snack Foods and Revere Juice/Soft Drinks sectors, which have grown by 21.90% and 17.78%, respectively, in the past year.
Conversely, our data is consistent with the overall trajectory of Wal-Mart's Apparel and Gaming suppliers, whose performance has remained relatively flat or down in the past year respectively. In fact, the Revere Gaming sector has posted -2.37% for the month and -13.70% for the past year.
Revere Research Reveals
Breaking down the Wal-Mart numbers, we have uncovered some trends and suppliers to watch. The chart below shows the top three performing sectors, which are significantly more specific than those found in the more widely used classification systems. Relying on tools within our patented research platform, along with the International Securities Exchange (ISE), we developed the ISE-Revere Wal-mart Supplier Index four years ago. It is designed to track the performance of the Wal-Mart supply chain at the most basic level, based on the goods and services Wal-Mart sells. The index itself focuses on Wal-Mart's 30 major suppliers (average market cap $1.5B and the percentage of revenues from Wal-Mart ranged from 15% to 40%)
|Name||1-Month Return%||1-Year Return %||3-Year Return %||Sample Stocks|
|ISE-Revere Wal-Mart Supplier (WMX)||4.32%||26.08%||70.90%||DMND, HAS, PRGO, CHD|
The latest results show the continued positive impact of Wal-Mart's stringent supplier requirements, its due diligence processes and the tight margins the retailer places on them. In addition, Wal-Mart suppliers all share these three common characteristics:
Produce quality products that appeal to a large customer base
Execute with speed and consistency
Ability to manage costs
Among the leading names within the Wal-Mart supplier universe are:
|Name||%Revenues from Wal-Mart||Sample Brands||1-Year Return %||3-Year Return %|
|Hasbro, Inc. (HAS)||25%||Milton Bradley, Cranium||53.88%||90.80%|
|Perrigo Company (PRGO)||23%||Milk of Magnesia||70.03%||91.40%|
|Cal-Maine Foods, Inc. (CALM)||33%||Egg-Land's Best, Farmhouse||18.36%||35.80%|
|TreeHouse Foods, Inc. (THS)||14%||Nature's Goodness, Mocha Mix||39.26%||121.40%|
|Alberto-Culver Company (ACV)||25%||Noxzema, Tresemme||28.66%||50.80%|
Many of Wal-Mart's suppliers possess well established brands with strong brand loyalty. Coupled with Wal-Mart as one of their biggest customers/distributors, their products have deep penetration into most market segments. Three of these companies were able to grow their top-line sales for the past year (PRGO, HAS, THS) while the other two companies posted stable sales during the same period (ACV and CALM). Research shows that during an economic downturn, purchasing behaviors come down to priorities - what people are willing to give up and what they can't live without: Food, medicines/prescription drugs are usually high on the must have list.
Two individual suppliers with continued strong prospects going forward come from the Revere Snack Foods and Revere Juice/Soft Drink sectors:
|Lance, Inc. (LNCE)||Second largest provider of snacks upon completion of its merger with Snyder. Currently 22% of sales to WMT.|
|Hansen (HANS)||Emerging leader in energy drinks with a conservative balance sheet and 9% of sales to WMT.|
Unsurprisingly, grocery items were named as experiencing positive growth, particularly snacks, soft drinks & juices. Another honorable mention was Optical Goods. We tracked all three niche sectors and their performances in the last three months and one year periods matched Wal-Mart's sentiment. We believe the positive trends will continue for snacks and soft drinks & juices, but we are less confident about Optical Goods since they can be considered more durable and are not replaced that often.
Giant mega cap companies, such as Wal-mart, may not offer market beating returns any time soon, but these companies do foster a healthy ecosystem in which many of their suppliers and partners can thrive and grow. Our research reveals that a closer look at key suppliers of world class companies is a productive venue for finding potential investment winners. We have found that the best of breed companies will not put their supply chain needs in jeopardy by working with less stellar suppliers. Investors may elect to pay attention the next time Wal-Mart, Target, Google (GOOG), or GE (GE) adds another key supplier to their roster.
Jeremy Zhou of Revere Data provided the original research and analysis as presented by Revere CEO Kevin O'Brien on CNBC's Closing Bell with Maria Bartiromo on August 19, 2010. Return figures have been updated as of 12/20/2010.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.