One indicator of increasing consumer confidence is rising retail sales. The largest retailer in the United States and globally is Wal-Mart (WMT) with a market capitalization of about $224 billion. The stock trades at around $66 per share. My purpose here is to analyze Wal-Mart and a few of its close competitors with a focus on revenue growth. Through this prism, we hope to arrive at some conclusions with regard to a correlation of consumer confidence to share price. I'll review key fundamentals for Wal-Mart and selected rivals. I will also offer up any relevant positive or negative catalysts.
Wal-Mart has a value leaning price to earnings ratio of 14.10, but the price to earnings growth ratio of 1.61 paired with a price to book of 3.23 diminishes it somewhat as a value stock. That said, Berkshire Hathaway (BRK.A) now holds around 47 million shares of Wal-Mart in its portfolio. Return on equity is above average at 23.49%. Wal-Mart's quarterly year-over-year revenue and earnings growth are 8.5% and 10.1% respectively. Debt to equity is 73.43 and the current ratio is 0.83. Wal-Mart pays
shareholders a dividend yielding 2.3% with a payout ratio of 32%. Wal-Mart is expanding its Wal-Mart Express concept and planning to open more of the stores which are a combination of a grocery, pharmacy and convenience store. The initial 10 stores moved to profitability inside of 12 months. I see this as a positive catalyst for revenue and earnings growth.
Costco (COST), a close rival, has about a $37 billion market cap and trades at around $86. Costco's trailing twelve month price to earnings ratio is 24.11 with a price to earnings growth ratio of 1.75 and a price to book of 2.95. Return on equity is 12.79% and quarterly year-over-year return on equity and earnings growth are 8.2% and 19.1% respectively. Costco pays a dividend yielding 1.20% with a payout ratio of 28%. Costco shares got a boost from analysts at JPMorgan Chase & Co. (JPM) who raised Costco's price target to $96.
Target (TGT), also competing with Wal-Mart, has a market cap of $38 billion and trades at around $58 per share. Its price to earnings ratio of 13.36 and price to earnings growth ratio of 1.20 coupled with a price to book of 2.41 and a return on equity of 18.89% are superior to Costco's corresponding fundamentals. Target also beats Wal-Mart in these areas, with the exception of return on equity, where Wal-Mart clearly leads. Target trails Wal-Mart and Costco in quarterly year-over-year revenue and earnings growth, reporting 5.8% and 1.2% respectively. Target's debt to equity ratio is the poorest of the 3 coming in at 110.45 and conversely,Target sports the best current ratio of all 3 with a 1.25 result. Target also pays a dividend yielding 2.1% with a payout ratio of 27%. This is not a significant differentiation from competing Wal-Mart and Costco. News of Target City's Chicago début is a positive catalyst for Target. Like Wal-Mart, it plans to engage the urban market with its new concept store scheduled to open in July 2012.
Dollar Tree (DLTR) trades at around $103 per share and has a smaller market capitalization than its rivals at about $12 billion. Dollar Tree has a price to earnings ratio of 24.47 and a price to earnings growth ratio of 1.16. It has a very high price to book, reported at 8.04, but the best return on equity we've seen here today of 33.93%. Quarterly year-over-year revenue and earnings growth are competitive, reported at 11.5% and 15% respectively. Dollar Tree's debt to equity and current ratios are overall winners as well, reporting in at 17.93 and 1.6 respectively. Dollar Tree does not offer shareholders a dividend.
Dollar General (DG) has a market cap of about $17 billion and trades at around $49. Trailing twelve month price to earnings is 22.03 and the price to earnings growth ratio is 1.06. Both price to book (3.52) and return on equity (17.58%) are near median among the 5 equities examined here. However, the quarterly year-over-year revenue and earnings growth are the most robust of the 5, coming in at 20.11% and 31.4% respectively. Debt to equity and current ratios are an acceptable 56.32 and 1.51 respectively. Like Dollar Tree, Dollar General pays no dividend. Worth noting is the fact Buffett's Berkshire Hathaway purchased 1.5 million shares of Dollar General in the second quarter 2011 at an average price of $32.83 per share. Berkshire's stake has since been pared back to 3.6 million shares a reduction of 19%.
Dollar Tree and Dollar General are not, in my opinion, directly comparable to Wal-Mart, Costco and Target. While there is certainly some degree of competition, the range of consumer goods available through Dollar Tree and Dollar General is significantly less expansive when compared to Target, Wal-Mart and Costco.
All the retailers we have looked at here are enjoying increased revenues, but can we conclude that consumer confidence is on the rise. At the end of the day, the answer has to be an emphatic no. The U.S. economy added just 69,000 jobs in May (and this may well be revised down if history is any guide). Not only is confidence being lost on the U.S. economic front, but in Europe as well. Italy and Spain are looking grim in economic terms and of course there is Greece. Clearly, all kudos must go to the management teams of these companies. These companies have managed to increase revenues and earnings in these most troubled of times.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.