Big Lots, Wal-Mart and Costco: 3 Musketeers of the Pooring of America

We've discussed all these names in the past [Dec 16: Target Shoppers Turning into Walmart Shoppers] - the 3 Musketeers of the weakening US consumer - Walmart (WMT), Big Lots (BIG), and Costco (COST), but it is helpful to review them after the destruction that has just occurred in the retail space - and see how well they held up. Total anecdotal story - I've never been to a Big Lots but I drove by one in the middle of the day, on a weekday 2 weeks ago and every (I mean every) parking spot was taken. During the workday - when most retailers are nearly empty. That opened my eyes.

In January this space was literally obliterated as it dawned on NYC traders that the rest of America doesn't make $400-$600K+ a year, and that the economy was weakening. I posted an entry showing a chart of almost every major subsector in retail and how 1 chart stood among all the rest - Walmart (WMT) [Jan 15: Will There Be Anywhere Left to Shop in 2010?]

Things are looking quite similar now, but instead of showing you 15 charts that look identical I'll just pick JCPenney (JCP) randomly as it is representative. By seeing this, you can compare to what the 3 Muskateers are doing. All charts will show the three 2008 corrections (January, March, and June) As I've written - retail will be the next financial - actually it has ALREADY BEEN the next financial - but it will continue to be. The consumer won't be 'recovering' anytime soon - this rebate check is hiding a lot of the reality. As the JCP chart - these stocks are lovely shorts on every short covering PLUS "a recovery is not far off fairy tale" rally. So we'll get another one of those soon enough, and it will create a fantastic shorting opportunity - again.



So as opposed to the 90% of retail charts that look identical to JCP, if you did not know better - you would barely realize there is a correction when you look at the 3 Musketeers. But to be in these stocks you'd have to realize the American consumer is fleeing his normal shops (moving downstream) and that indeed the economy is poor - unlike what you'd hear from various government officials and their shoddy reports. Charts don't lie - people do. See below.

I've debated adding any of these 3 over the past few months (I'd probably choose Big Lots at this point if I added here) - part of the barbell strategy (i.e. have things completely outside the "global growth" part of the portfolio). And if we do get that type of "sector rotation" that usually comes every so often - it might soon be time for these to shine further (although their absolute strength in market adversity is shine enough for me) Tough sector (the tide is definitely NOT rising) - but as a very shy financial TV pundit likes to say "there is always a bull market somewhere".

Disclosure: No positions

Comments

[deaverb]

As a supplier to Target, Best Buy, and other high end folks, as well as grocers like Kroger, drug chains such as Walgreen, and our core growth area--dollar, Dollar Tree (growing 700% faster in US than Wal-Mart, with more stores), Big Lots, DG, and 99 cent stores, we see things outside of the charts.

1. They buy great stuff. Our software/audiobooks sell for $1 to $1.99 in these outlets; same stuff at $4.99 or higher in the high end folks. Same for many others.

2. The Ames, Zayre, Kmart junk of old is gone. The value retailers only buy solid reliable products (of course an error occurs here and there, but my experience is Target and BBY has more of them).

3. Cost control. N 30; FOB; no returns; clean. That means people price to the penny.

4. Simple systems: emailed or faxed orders; scan goods on back of truck. No invoices allowed as a rule. No expensive EDI. Clean.

That's a formula for growth.

[quetzalcoatl]

Long positions in any retailer are an invitation to capital shrinkage. I've been watching closely and believe a position in Wal Mart will erode less than many others, but erode it will.

[borisb]

the price of chinese goods are rising at nearly 20% rate.

[Daniel Jacome]

WAG is getting smoked, stock isnt in favor at all right now.

[bhakta]

I like COSTCO.. Considered by me the best managed of the big box retailers. Never had a bad experience with COSTCO and I feel certain they will thrive as the US economy worsens. I don't know BIG LOTS, but from the description above they sound as though they are doing very well. No matter how bad things get, people have to eat, wear clothes and buy personal necessities. These big three are geared for this.

[anvor]

I drive by a Big Lots every Tuesday. The parking lot is nearly empty at 6:30 p.m. Always. Which tell me that perhaps the people who shop there during working hours are the bums and the retired (looking inside store - bums and illegals). Meaning, BigLots appeal is not universal, and may not have an up trend in the wings.

[trader_murf]

I have been looking at Costco here but it seems to have resistance somewhere between 74.47 and 75. Looks like it could go back to 70 or even 67.85 before going higher. I found the comment about increasing costs of Chinese imports interesting and something to consider. In any event I think it is time for me to get a membership to shop there even if I don't buy the stock. Thanks for the article.

[msmama]

My daughter and I have been shopping at Big Lots for years as we've moved around the country. We have found more fun things there at great prices. I resent anvor's comment re bums etc. She is an NP, her husband is an MD, and I am MS mama living of my investments.

[Tao]

Wal-mart doesn't buy near as much from China, now. They buy from Asia.

Everything is going up that the retailer has to sell. Wal-Mart just doesn't try to make a fortune off of each person that walks through the door. They have every day lower prices.