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Wal-Mart or Kroger: Which Retail Stock Is More Appealing?
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The retail sector has been witnessing rapid changes of late. The e-commerce business is improving and is acquiring substantial market share of brick-and-mortar stores. Customers now prefer online shopping over buying from stores. This in turn has adversely impacted the store traffic.
Retailers are focusing on improving their e-commerce businesses to tap in on the growing popularity of online shopping. However, by no means are they able to compete with Amazon.com Inc. (AMZN - Free Report) , which dominates the e-commerce market space.
The industry is also facing major challenges from a still-strong U.S. dollar, volatile commodity costs and uncertain economic environment. A strong dollar has resulted in lower spending from foreign tourists and is impacting retailers’ overseas operations. A highly promotional environment is also forcing retailers to slash prices thus impacting margins negatively.
The not-so-promising scenario in the retail sector is also evident in the performance of the Retail – Supermarkets industry. Out of the 265 industries, the Retail – Supermarkets industry holds a Zacks Industry Rank #218, part of the bottom 15% of the Zacks Classified industries. Even the broader Retail and Wholesale sector is at the bottom of the Zacks Classified sectors (16 out of 16).
Having said this, let’s try to ascertain which of these two key retailers – Wal-Mart Stores, Inc. (WMT - Free Report) or The Kroger Company (KR - Free Report) -- presently make for a better investment option in face of the headwinds hampering the retail industry.
Looking into our proprietary Zacks Rank, which is designed to predict price movements over the next one to three months, comes in handy in this scenario. Going by this metric, both Wal-Mart and Kroger carries the Zacks Rank #3 (Hold), highlighting the fact that these are likely to outperform the broader market over the next one to three months. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Let’s delve into the details.
Size and Scale of Operations
While Kroger’s market capitalization is $26.7 billion, Wal-Mart’s same is $220.01 billion. Going by its business size, Wal-Mart is obviously better positioned over the long term due to its massive scale of operations.
VGM Score
We note that the VGM score is a comprehensive tool that will allow investors to filter through the standard scoring system and choose better winning stocks. In order to screen out potential winning stocks, we consider only those that have a Zacks Rank #1 or 2 (Buy) and a VGM score of ‘A’ or ‘B.’ However, if we consider stocks with a Zacks Rank #3, we should opt for a better grade.
In that case, Wal-Mart seems to outpace Kroger on Style Score as well, as Wal-Mart’s VGM score of ‘A’ is favorable than Kroger’s VGM score of ‘B.’ Hence, we should consider it a favorable investing option.
Valuation Fundamentals
Considering price-to-earnings (P/E) ratio, Kroger looks pretty undervalued when compared with the Zacks categorized Retail-Supermarkets industry over the past year. The stock has a trailing 12-month P/E ratio of 13.93, which is below the trailing 12-month P/E ratio of 15.83 for the industry. On the other hand, Wal-Mart is overvalued as the stock has a trailing 12-month P/E ratio of 16.59, which is higher than the industry.
Quarterly Performance
Kroger reported in-line earnings in fourth-quarter fiscal 2016 on Mar 2, after delivering a negative earnings surprise of 2.4% in the third quarter. The grocery retailer posted an earnings decline of 7% in the quarter. Total sales grew 5.5% to $27.6 billion from the prior-year quarter and came ahead of the Zacks Consensus Estimate of $27.4 billion, marking the second straight quarter of revenues beat.
We believe that Kroger’s dominant position enables it to expand store base and boost market share. The company’s customer-centric business model provides a strong value proposition to consumers. The company added over 420 ClickList and ExpressLane locations in fiscal 2016. However, stiff competition, food price deflation, an aggressive promotional environment and waning store traffic are the primary headwinds plaguing the provider of daily need items.
On the other hand, on Feb 21, Wal-Mart reported better-than-expected fourth-quarter fiscal 2017 results, wherein both earnings and revenues exceeded the Zacks Consensus Estimate. However, it still faces many headwinds which are likely to impact earnings in the near term. Higher expenses, lower margins at Wal-Mart U.S. and currency headwinds are expected to affect the results.
Nevertheless, the company’s efforts to boost sales and regain investors’ confidence remain impressive. Wal-Mart has posted positive comps at Wal-Mart U.S. for 10 successive quarters due to improving traffic, backed by rising consumer spending. In fact, the company continues to expect positive comps year over year at Wal-Mart U.S. in fiscal 2018.
Wal-Mart is currently trying every means to compete with brick-and-mortar rivals and e-commerce king Amazon.com. In this regard, the company continues to make huge investments in e-commerce initiatives, including acquisitions. The acquisition of Jet.com, U.S. e-commerce company, in Sep 2016 marked a major step toward accelerating its online business. The acquisition has provided customers with a wider online market place where they can purchase items at discounted prices.
Post this acquisition, the company has acquired three more firms in 2017 which are in line with the company’s efforts to grow its online activities. Wal-Mart has also launched its own mobile payment system called Walmart Pay in all of its 4,500-plus U.S. stores in Jul 2016 to enable shoppers to pay through its existing smartphone app. Wal-Mart is also aggressively trying to get a share of the pie in the online grocery shopping and delivery industry.
Estimate Revisions
Upward estimate revisions are indicative of positive investor sentiment about a stock. While the Zacks Consensus Estimate for Wal-Mart has remained unchanged for fiscal 2018 and 2019 over the last 30 days, it has gone down 1.7% for fiscal 2017 and 1.3% for fiscal 2018 over the last 30 days at Kroger rendering a doubt on the stock.
The above arguments do not indicate positive movement of estimates. However, since Wal-Mart is not showing any negative revisions, it is better placed than Kroger which is witnessing downward estimates revision.
Price Performance
The performance of the companies is well-reflected in the prices over the past one year. While shares of Kroger significantly underperformed the Zacks categorized Retail-Supermarkets industry, those of Wal-Mart outpaced the broader industry. While Wal-Mart’s shares improved 3.97%, Kroger slipped 22.69% since the past year. The industry has advanced 0.59% since last year.
The above arguments clearly states that Wal-Mart is better placed currently and should offer greater value for investors.
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Wal-Mart or Kroger: Which Retail Stock Is More Appealing?
The retail sector has been witnessing rapid changes of late. The e-commerce business is improving and is acquiring substantial market share of brick-and-mortar stores. Customers now prefer online shopping over buying from stores. This in turn has adversely impacted the store traffic.
Retailers are focusing on improving their e-commerce businesses to tap in on the growing popularity of online shopping. However, by no means are they able to compete with Amazon.com Inc. (AMZN - Free Report) , which dominates the e-commerce market space.
The industry is also facing major challenges from a still-strong U.S. dollar, volatile commodity costs and uncertain economic environment. A strong dollar has resulted in lower spending from foreign tourists and is impacting retailers’ overseas operations. A highly promotional environment is also forcing retailers to slash prices thus impacting margins negatively.
The not-so-promising scenario in the retail sector is also evident in the performance of the Retail – Supermarkets industry. Out of the 265 industries, the Retail – Supermarkets industry holds a Zacks Industry Rank #218, part of the bottom 15% of the Zacks Classified industries. Even the broader Retail and Wholesale sector is at the bottom of the Zacks Classified sectors (16 out of 16).
Having said this, let’s try to ascertain which of these two key retailers – Wal-Mart Stores, Inc. (WMT - Free Report) or The Kroger Company (KR - Free Report) -- presently make for a better investment option in face of the headwinds hampering the retail industry.
Looking into our proprietary Zacks Rank, which is designed to predict price movements over the next one to three months, comes in handy in this scenario. Going by this metric, both Wal-Mart and Kroger carries the Zacks Rank #3 (Hold), highlighting the fact that these are likely to outperform the broader market over the next one to three months. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Let’s delve into the details.
Size and Scale of Operations
While Kroger’s market capitalization is $26.7 billion, Wal-Mart’s same is $220.01 billion. Going by its business size, Wal-Mart is obviously better positioned over the long term due to its massive scale of operations.
VGM Score
We note that the VGM score is a comprehensive tool that will allow investors to filter through the standard scoring system and choose better winning stocks. In order to screen out potential winning stocks, we consider only those that have a Zacks Rank #1 or 2 (Buy) and a VGM score of ‘A’ or ‘B.’ However, if we consider stocks with a Zacks Rank #3, we should opt for a better grade.
In that case, Wal-Mart seems to outpace Kroger on Style Score as well, as Wal-Mart’s VGM score of ‘A’ is favorable than Kroger’s VGM score of ‘B.’ Hence, we should consider it a favorable investing option.
Valuation Fundamentals
Considering price-to-earnings (P/E) ratio, Kroger looks pretty undervalued when compared with the Zacks categorized Retail-Supermarkets industry over the past year. The stock has a trailing 12-month P/E ratio of 13.93, which is below the trailing 12-month P/E ratio of 15.83 for the industry. On the other hand, Wal-Mart is overvalued as the stock has a trailing 12-month P/E ratio of 16.59, which is higher than the industry.
Quarterly Performance
Kroger reported in-line earnings in fourth-quarter fiscal 2016 on Mar 2, after delivering a negative earnings surprise of 2.4% in the third quarter. The grocery retailer posted an earnings decline of 7% in the quarter. Total sales grew 5.5% to $27.6 billion from the prior-year quarter and came ahead of the Zacks Consensus Estimate of $27.4 billion, marking the second straight quarter of revenues beat.
We believe that Kroger’s dominant position enables it to expand store base and boost market share. The company’s customer-centric business model provides a strong value proposition to consumers. The company added over 420 ClickList and ExpressLane locations in fiscal 2016. However, stiff competition, food price deflation, an aggressive promotional environment and waning store traffic are the primary headwinds plaguing the provider of daily need items.
On the other hand, on Feb 21, Wal-Mart reported better-than-expected fourth-quarter fiscal 2017 results, wherein both earnings and revenues exceeded the Zacks Consensus Estimate. However, it still faces many headwinds which are likely to impact earnings in the near term. Higher expenses, lower margins at Wal-Mart U.S. and currency headwinds are expected to affect the results.
Nevertheless, the company’s efforts to boost sales and regain investors’ confidence remain impressive. Wal-Mart has posted positive comps at Wal-Mart U.S. for 10 successive quarters due to improving traffic, backed by rising consumer spending. In fact, the company continues to expect positive comps year over year at Wal-Mart U.S. in fiscal 2018.
Wal-Mart is currently trying every means to compete with brick-and-mortar rivals and e-commerce king Amazon.com. In this regard, the company continues to make huge investments in e-commerce initiatives, including acquisitions. The acquisition of Jet.com, U.S. e-commerce company, in Sep 2016 marked a major step toward accelerating its online business. The acquisition has provided customers with a wider online market place where they can purchase items at discounted prices.
Post this acquisition, the company has acquired three more firms in 2017 which are in line with the company’s efforts to grow its online activities. Wal-Mart has also launched its own mobile payment system called Walmart Pay in all of its 4,500-plus U.S. stores in Jul 2016 to enable shoppers to pay through its existing smartphone app. Wal-Mart is also aggressively trying to get a share of the pie in the online grocery shopping and delivery industry.
Estimate Revisions
Upward estimate revisions are indicative of positive investor sentiment about a stock. While the Zacks Consensus Estimate for Wal-Mart has remained unchanged for fiscal 2018 and 2019 over the last 30 days, it has gone down 1.7% for fiscal 2017 and 1.3% for fiscal 2018 over the last 30 days at Kroger rendering a doubt on the stock.
The above arguments do not indicate positive movement of estimates. However, since Wal-Mart is not showing any negative revisions, it is better placed than Kroger which is witnessing downward estimates revision.
Price Performance
The performance of the companies is well-reflected in the prices over the past one year. While shares of Kroger significantly underperformed the Zacks categorized Retail-Supermarkets industry, those of Wal-Mart outpaced the broader industry. While Wal-Mart’s shares improved 3.97%, Kroger slipped 22.69% since the past year. The industry has advanced 0.59% since last year.
The above arguments clearly states that Wal-Mart is better placed currently and should offer greater value for investors.
Now See Our Private Investment Ideas
While the above ideas are being shared with the public, other trades are hidden from everyone but selected members. Would you like to peek behind the curtain and view them? Starting today, for the next month, you can follow all Zacks' private buys and sells in real time from value to momentum . . . from stocks under $10 to ETF and option moves . . . from insider trades to companies that are about to report positive earnings surprises (we've called them with 80%+ accuracy). You can even look inside portfolios so exclusive that they are normally closed to new investors. Click here for Zacks' secret trades >>