HSBC named Walmart its favorite of a group of seven U.S. retailers it initiated coverage of in a new report on Friday, saying Dollar General Corp. is its least favorite.<\/p>\n
Analysts assigned Walmart The pandemic greatly accelerated digital sales, which now account for about 15% of total retail sales in the U.S., up from about 10% before the pandemic broke out in 2020. <\/p>\n HSBC is expecting that trend to continue with online purchases becoming the main driver of retail sales and growing at a faster pace than bricks-and-mortar sales. At the same time, offline sales will remain the most relevant channel for most players, accounting for about 80% of sales by 2027.<\/p>\n \u201cIn our view, retailers with the best offline-to-online, or O2O, strategies will be the leaders in this environment,\u201d said analysts Daniela Bretthauer and Guilherme Domingues. <\/p>\n <\/p>\n The analysts reviewed the seven companies against the background of the postpandemic world, in which consumers appear to be valuing experiences over discretionary goods purchases. That\u2019s based on the amount of travel \u2014 and especially international travel \u2014 that was recorded this summer, the first in which people were comfortable flying long distances again.<\/p>\n \u201cWith mobility essentially back to normal post COVID-19 disruptions, spending on travel and experiences is gaining momentum at the expense of discretionary spending on physical goods, accounting for a higher share of total consumer expenditures, as reported in the U.S. Census Bureau for economic data,\u201d the report said.<\/p>\n Some discretionary goods, such as furniture, building materials and electronics, enjoyed \u201cpulled-forward\u201d demand in 2020, and are now experiencing volatility. The BEA has found the personal savings rate is below prepandemic levels, suggesting householders are relying on excess savings to support consumption.<\/p>\n As high inflation squeezes household budgets, consumers are spending more carefully, but of course, groceries remain a priority.<\/p>\n That makes Walmart a top pick for the analysts, who praised its \u201csuperior O20 strategy, sheer size, and attractive growth story with operating profits growing at a faster pace than sales.\u201d<\/p>\n \u201cSize matters in retail,\u201d they wrote. Walmart snaps up one in every four U.S. dollars spent on U.S. groceries, which is almost as much as Kroger, Costco and Albertsons combined. <\/p>\n Dollar General, in contrast, is behind on digitization and is hurting from a dearth of short-term drivers. The company has a strong value proposition as the biggest discount retailer by store count in the U.S., but its exposure to weaker consumer spending on discretionary goods call for a bearish view, said the report.<\/p>\n Read also: <\/strong>Lower-income households \u2018are acting recessionary today.\u2019 JPMorgan gives Dollar General its worst rating after company presentation<\/p>\n Costco\u2019s \u201cShares appear fairly valued trading at a 2024e PE of 36x (10% premium to the historical average), and we see few near-term catalysts,\u201d said the report.<\/p>\n Home Depot See also: <\/strong>Dollar-store stocks slide and UBS says Chinese discount websites may be their next challenge<\/p>\n \u201cWhile we acknowledge Home Depot\u2019s distinct competitive advantages and operational excellence, we think shares present a balanced risk\/reward return,\u201d the analysts wrote.<\/p>\n Kroger \u201cGiven that shares are trading in line with the historical sector average and Lowe\u2019s is the second-largest home-improvement retailer in the U.S. after Home Depot and it has returned $34 billion to shareholders in the last four years for an average return on invested capital of 37%. However, \u201cshares appear fairly valued given that our target PE multiple is 6% below the average multiple the stock traded at during the pandemic years.\u201d<\/p>\n
\n WMT,
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\n a buy rating and Dollar General
\n DG,
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\n a reduce rating, equal to sell. It assigned Costco Corp., Home Depot, Kroger\u2019s Inc., Lowe\u2019s Inc. and Target Co. a hold rating. <\/p>\n
\n HSBC report
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\n COST,
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\n e-commerce strategy complements its warehouse business well and its pricing is competitive. <\/p>\n
\n HD,
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\n is a leader in the fragmented but large home-improvement market, which is estimated to be worth about $1 trillion. It has a solid 020 strategy and delivered $50 billion in revenue and $6 billion in earnings in the last three years.<\/p>\n
\n KR,
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\n meanwhile, would be the third-largest U.S. food retailer if its merger with Albertson\u2019s
\n ACI,
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\n goes through, but the timing and terms of any deal remain unclear.<\/p>\n
merger uncertainties, we believe the stock is fairly priced,\u201d said the report.<\/p>\n