Discount Retail: Ross Leads, TJX Cools
Earnings from TJX (TJX) and Ross Stores (ROST) put discount retail in focus this week. Ross was the big winner, with same-store (comp) sales up 10%. TJX reported comp growth of 4%. Friday's early reaction: TJX cooling off, Ross up 3.5%, Dollar Tree (DLTR) up 1%, and Dollar General (DG) up 1%.
The strong numbers say the consumer is still hunting for value. Oil prices are fairly high, so shoppers save money where they can. This is the K-shaped economy at work: lower-income consumers looking for deals, plus higher-income people trading down.
Ross has an easier model to run than TJX. TJX carries many different formats and a wide mix; Ross stays in its lane. TJX gets more attention because it is much bigger, but Ross is an outstanding, world-class retailer and has been a stellar performer for years.
TJX posted solid numbers, but its forecast worried the market. With a business selling everything from furniture to towels to food, TJX will not be perfect every quarter. "Perfection is difficult to attain and probably more difficult to maintain." Wall Street got used to TJX never hitting a speed bump since coming out of COVID, which is not realistic. Assortments will not always be flawless, and shoppers may find other options for short stretches. Retail is a long game; the best retailers plan for the long term and do not wring their hands over one choppy quarter. TJX should outperform in the back half of the year.
Walmart: Weak Comp Headline, Valuation the Real Issue
Walmart (WMT) drew attention because comp sales were the lowest in 6 years, but digging into the numbers, results did not look that bad. Analysts are split between short-term domestic growth worries and long-term fundamentals. The selloff was more about valuation than what Walmart actually reported.
The valuation has gotten stretched. Last quarter it sat in the 40s; now it is in the high 30s. That is rarefied air, and it piles pressure on management to hit quarter-over-quarter targets the street likes. Quarterly reporting is a poor way to judge retailers; the best ones plan long term, and no one plans long term better than Walmart. Its acquisition of Vibe is not the same scale as the earlier Jet moonshot, but it shows how creative the company is.
On a 2% comp against $700 billion in revenue, the dollar gain is large. Last year's second quarter was in the mid-4s, and the year before was also mid-4s, so 2.5% is nothing to sneeze at in this environment, especially after rolling back 11,000 prices since the start of the year. Those price cuts hurt the comp now but should win more customers and flow through over the longer term.
A Walmart Options Trade
Walmart fell double digits on a percentage basis and hit nine-month lows just above $102 a share. Comps came in at 2.6%, far below what the street expected. The conference call was upbeat, but the company lowered guidance for the current quarter while giving inline guidance for the full fiscal year. Inflation pressure and the high forward valuation are what has been hitting the stock.
One strategy here is a cash-secured put. Go to the September 11 weekly cycle, 21 days to expiration, and sell an out-of-the-money 100-strike put. You collect a credit of about $1 per put, or $100 per put sold. If the stock drops back below 100, that dollar credit brings your break-even down to $99, over 3% below the current share price, so you buy the shares at $99 instead of just above $102. If the stock stays above 100 over the next three weeks, you keep the $100 credit.
The setup works two ways: you profit if the stock does not fall, and if it does fall, you buy at a more than 3% discount. Putting a plain $99 buy bid on the shares might never get filled; this trade pays you either way. Walmart was down 1.3% at the time.
