Today’s Research Reports on Stocks to Watch: Wal-Mart Stores and Costco
Both Wal-Mart and Costco felt the burn on Friday as leading competitor Whole Foods was scooped up by Amazon in a deal worth $13.7 billion. “Once Amazon is a player in the industry, anything can go,” remarked Joe Agnese, senior food retailing analyst at CFRA. “The big threat is what else they can do. Now that they have a retail presence with (more than) 400 stores, long-term they can expand on that threat. They can (bring) pricing pressure. They could bring down prices and everyone would have to match them or lose share." It’s not surprising that shares of Wal-Mart and Costco fell as traders try to make sense of what the future may look like now in the grocery arena.
RDI Initiates Coverage on:
Wal-Mart Stores, Inc.
Costco Wholesale Corporation
Wal-Mart Stores, Inc. shares closed down 4.65% this past Friday with volume traded at over 56 million shares. Wal-Mart and Amazon have been quite the rivals in recent years, trying to gain dominance in the market. Wal-Mart bought Jet.com last year for $3 billion to expand its presence in the online category. Amazon just fired back with a nearly $14 billion purchase of leading organic grocery chain Whole Foods which means Wal-Mart may be facing strict competition now in the brick-and-mortar arena. Considering that groceries made up 56 percent of Wal-Mart’s revenue for the year ending January 31st, the company will have to be on its toes after this kind of move is what traders were most likely thinking. Roger Davidson commented "I think this acquisition is a concern." Davidson is the man who oversaw Wal-Mart’s global food procurement and now is president of Oakton Advisory Group. Shares of Walmart closed at $75.24 on Friday.
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Costco Wholesale Corporation shares closed down 7.19% on Friday with staggering trading volume at over 24 million shares. Shares fell as much as 8.4% during intra-day trading as news swept the market that Amazon would be acquiring Whole Foods. Traders became worried and cautious over what kind of threat Amazon’s purchase of the organic food retailer could do for Costco and other rivals. Costco had also just increased their annual memberships for the first time in five years this month. Oliver Chen and the team at Cowen’s still seem optimistic, and said, "We believe COST’s superior value proposition, strong merchandise procurement, fixed margin structure, strong renewal rates, and a superior gas and ancillary business should continue to drive industry leading physical store traffic. While we acknowledge COST’s FY2 P/E of 28.7x is elevated compared to most market peers, we believe a premium is warranted given (1) its annuity like membership model; (2) COST is growing its store fleet by ~30/yr (half U.S. and half Internationally) or ~+4% sq ft next year; and (3) U.S. traffic accelerated to +4% in 3Q17 and appears healthy given numerous industry headwinds. We do acknowledge COST needs to expand its e-comm and omni-channel capabilities including adding BOPUS, improving its app functionality, increasing delivery speed, growing online SKUs and introducing scan and go."
Access RDI’s Costco Wholesale Research Report at:
Our Actionable Research on Wal-Mart Stores, Inc. (NYSE: WMT) and Costco Wholesale Corporation (NASDAQ: COST) can be downloaded free of charge at Research Driven Investing.
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