Analyst says Walmart's pricing turning 'more competitive' vs. hardline retailers

Shares of Big Lots (BIG), Dollar General (DG) and Dollar Tree (DLTR) are in focus in morning trading after an analyst downgraded all three discount retailers from Strong Buy, citing a recent pricing survey. HARDLINE RETAIL DOWNGRADES: Raymond James analyst Dan Wewer downgraded Big Lots, Dollar General and Dollar to Outperform from Strong Buy and lowered Big Lot's price target to $48 from $60 and Dollar General's price target to $105 from $110. The analyst maintained a $110 price target on Dollar Tree. In a research note to investors, Wewer cited his most recent pricing survey, which indicates Walmart's (WMT) pricing has turned more competitive, with national branded consumables now 4.4% lower in price compared to Dollar General and 6.5% below Family Dollar, relative to in line over the past year. The elevated competition leaves value retailers to react by either lowering pricing in order to protect market share, which will impact negatively on margins, or maintain pricing, which could become a comp sales headwind once consumers take notice to Walmart's value offering, Wewer said. However, the analyst said he believes Big Lots is the most attractive "deep value" idea in hardline retail and expectations are so low that it will take only a modest improvement in top line results to rally the stock price. In addition, Wewer estimates Dollar General will deliver 8%-9% annual revenue growth due to additional selling space, remodels of its store base and an increase in same-store sales, but said EBIT percentages are near lifetime highs, reducing the opportunity for significant improvement. The analyst added that he views Dollar Tree as the "best-in-class" value retailer and sees upside for the Family Dollar segment, but also sees risk of declining EBIT percentage from the lifetime highs in fiscal year 2018. WHAT'S NOTABLE: "Although Walmart's aforementioned price gap is not yet alarming relative to Dollar General and Family Dollar, it does increase the risk for the value retailers," Wewer said. The analyst added that the value retailers are now facing a dilemma that dampens his bullish investment themes for the sector and that during FY18, the value retailers will need to either reactively lower their pricing in order to protect market share, which may negatively impact product margins, or maintain their current pricing levels, while continuing to promote their convenience niche vs. Walmart, which could become a comp sales headwind over time. PRICE ACTION: In morning trading, Big Lots was up 0.6% to $42.29, while Dollar General and Dollar Tree fell 0.4% to $95.91 and $96.70, respectively.

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