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Winners And Losers In The Fight For Consumer Dollars

Posted on Tuesday, March 3rd, 2020 by Thomas Hughes

The Consumer Is Underpinning U.S. GDP Growth

The consumer has been underpinning U.S. GDP growth for years. Tight labor markets, rising wages, and low inflation have combined to create an economic tailwind that will not soon abate. The latest data shows labor trends are intact, that inflation is still low, and that consumer spending will push GDP growth in the first half of the year.

That said, it’s not all wine and roses for the retailers. The consumer is fickle, the consumer wants a good deal, and the consumer is easily swayed by the herd no matter what the product is. Bottom line, some retailers win and some don’t because finding the recipe success isn’t easy.

Kohl’s Isn’t Exactly Winning But With A 7.0% Yield You Might Not Care

Kohl’s (KSS) reported earnings this morning and sent its shares up more than 3.0%. The move, while good on paper, does little to alter the reality of the results. Koh’s beat on the top and bottom line but only just. Revenue grew a mere 0.1% over the last year, nothing to brag about, and the outlook for the coming year isn’t awesome. Managers see revenue growth in a range of -1.0% to 1.0% versus the consensus 0.5% but it’s not growth you want to own Kohls for.

Kohl’s is a higher quality dividend payer despite any woes facing the retail sector. The company has a strong balance sheet and solid free cash flow to sustain the dividend over the coming years. The payout ratio is a little high at 60% but still manageable and there is no indication the company is contemplating a cut. Far from it, in fact. Today’s news includes an increase in the distribution that puts the yield over 7.0% and at levels we may never see again

Winners And Losers In The Fight For Consumer Dollars

Target’s Win Not Rewarded By The Market

Target (TGT) also reported earnings this morning. The company reported a solid quarter with revenue and eps growth, expanding margins, and gave positive guidance and yet shares are moving lower. The market, in its infinite wisdom, was expecting a bit more and too bad for them. The good news for us is that Target, a Dividend King, is trading at discounted levels with a distribution increase expected next quarter.

With it’s history of increases and a 41% payout ratio future increases are all but assured. The only negative about the dividend is the yield, about 2.42%, but even that’s not bad when you factoring in the health, the outlook for increases, and plans for growth.

Looking forward, Target is expecting long-term profitable growth. Much of the growth will be centered in the eCommerce segment, a segment the company is leading. While comps rose a tepid 1.5% versus the 2.1% expected sales through eCommerce channels increased 20%. What makes this growth stand out is that Target’s eCommerce growth is firmly centered in same-day and curbside fulfillment, about 80%, a segment that Amazon has yet to conquer.

Technically speaking, Target shares are in an uptrend although the last 6 or 7 months have been more sideways than not. The corona-virus inspired correction has the stock trading and bouncing from a key support level that I think will be retested again. Support is that the top of an open gap that formed in the middle of last year. A move lower to retest and confirm this level would a signal to buy.

TJX Companies Are Winning The Battle

TJX Companies (TJX) reported earnings last week and appear to be winning the battle. TJX operates discount and closeout retail brands like TJMaxx and Marshalls. The company saw comp sales increase by 6% in the calendar 4th quarter and for one reason, you can get name brand items for a great price. What’s really impressive is the 6% comp is on top of a 6% comp last year showing sustained growth above the analyst’s expectations.

When it comes to positioning within the market TJX Companies have a strong moat. As a retailer of overstocked and closeout items it benefits when other retailers lose.

TJX Companies is the weakest dividend payer in terms of its yield, only 1.5%, but there are other factors to consider. First, the company is growing organically at a high-single-digit rate and that growth is expected to continue in the coming year. Second, TJX Companies is a Dividend Aristocrat with a super-safe payout and history of aggressive dividend increases. Over the last five years, the distribution has been increased by an average of 20% annually.

Winners And Losers In The Fight For Consumer Dollars

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