Discount Retailers Feeling the Pressure?
Posted on: July 23, 2008 - Email Article - Printable Version
Inflation and rising energy prices are starting to seep through the economy, even affecting discount retailers to an extent. Costco Wholesale Corporation [COST: 51.28, -1.01 (-1.93%)] released a statement today stating that they would miss Q4 EPS estimates of $1 per share by a large amount. They noted that this was due to inflation, particularly rising energy costs. Most would think this would be good for Costco, as people would flee to the discount retailers during bad times, but Costco’s gasoline business is hurting after the run up in crude oil prices over the past year. They have also refused to increase merchandise prices in order to “drive sales and maintain the confidence of our members”, according to the press release, which has hurt their bottom line numbers.
What does this mean for the outlook of other discount retailers like BJ’s [BJ: 34.06, +0.03 (+0.09%)] and Wal-Mart [WMT: 55.89, -0.63 (-1.11%)]? While both firms are engaged in the gasoline business, they do not derive as much of their revenues from this segment as Costco. Going forward I would not expect it to cause as big a problem for Wal-Mart and BJ’s as demand in the stores should still stay strong due to changes in consumer spending habits towards discounted goods.
While we have had quite a rally the past few days, as earnings season has not been as bad as analysts have expected, I do not believe this rally will last, especially once the new unemployment numbers, housing data come and and previous quarters GDP are revised. There is still a lot that needs to be fixed before we are out of this downturn. Now that over 95% of the stimulus checks have been sent out, the consumer will not have as much spending power in the next quarter, which is what drove encouraging retail sales in the past month. As a consumer recession approaches due to this lack of extra money, we will see people starting to save more and spend less and if they do spend they will be looking for discounts. Noting that consumer spending accounts for about 70% of GDP, it would not surprise me to see us officially in a recession (two quarters of negative GDP growth) sooner rather than later. With the the turmoil in the housing market showing no signs of slowing down, a recession seems imminent, if we are not already in one.
I remain bullish on the discount retailers, as firms like Wal-Mart and BJ’s should see an increase in sales as more and more consumers look for discounts during hard times. I would remain cautious on Costco due to the fact that their gasoline business should continue to produce problems with the rise in crude oil prices. As people look to cut down on spending, discounters Wal-Mart and BJ’s should continue to post solid results.
-Vinay Ayala
Disclosure: Author has no positions in the stocks mentioned.
The Following Stocks Were Mentioned In This Article: BJ, COST, WMT
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Best Play: Buy Walmart on weakness. It’s obvious that they are not experiencing the same problems that Costco reported. Yet, the share price took a hit today. Because of this, there is an easy 2-4% gain right off the top that you should be able to secure relatively easily