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Walmart Inc. was upgraded to outperform by Credit Suisse on Wednesday, earning its second upgrade of the week, as the coronavirus pandemic drives shoppers to their local grocers to stock up on food and necessities.
Credit Suisse analysts led by Seth Sigman said there’s more to it that a temporary benefit.
“We see this unfortunate period accelerating structural changes in consumer shopping, possibly by five-plus years, as they are introduced to new retailers and new shopping methods including online grocery and delivery, and further consolidate purchases at multi-category, multi-channel retailers,” the analysts wrote in a note to clients.
Long term, they are expecting a shift to more food being consumed at home.
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“This change should be sticky, and favor Walmart, as it’s invested in its infrastructure, technology and people, to evolve its model,” analysts wrote. “In our view, Walmart is no longer just an early cycle, defensive, low-price player, as in prior cycles. Its market share growth story and this period should validate the changes it’s made.”
Credit Suisse raised its price target to $127 from $115.
Oppenheimer also upgraded Walmart WMT, +2.20% to outperform this week. Oppenheimer has a 12-to-18 month price target of $125 on Walmart stock.
“As we look forward, we believe the company is well positioned to still deliver on financial targets, and shares could benefit from money flows shorter-term as investors likely continue to seek safety in a more uncertain global economic backdrop,” analysts led by Rupesh Parikh wrote.
“As we have written about previously, grocers have clearly benefited from consumer stock-up activities lately.”
Analysts also expect an economic stimulus program from the government, which should help Walmart shoppers, especially lower-income earners.
Walmart announced last week that it would cut operating hours at its stores and its Neighborhood Markets locations, with opening hours from 6 a.m. to 11 p.m. Some of Walmart stores are typically open 24 hours.
“We’ve got a lot of categories that have seen extraordinary growth levels in the past few weeks,” Walmart U.S. Chief Executive John Furner said in a video statement. “This started in over-the-counter pharmaceuticals, then food and consumables, and now it’s moving into our food businesses.”
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U.S. retail sales fell 0.5%, according to the most recent numbers, although UBS analysts note that some categories have rallied over the past couple of weeks.
“Household personal care (HPC) categories showed the strongest demand surge, with packaged food, fresh and beverages tracking relatively even for the last one-week and two-week periods,” analysts led by Steven Strycula wrote in a note.
“In the next data release (Mar. 31), we anticipate food trends to accelerate further versus other staples categories as the impact of restaurant and school closures drives a strong shift in consumer spend to online, grocery shopping and at-home consumption.”
Restaurant companies have stopped dine-in service and shifted to takeout, pick-up and delivery as “social distancing” becomes more important to curbing the spread of coronavirus.
Some chains, like Yum Brands Inc.’s YUM, -7.09% KFC, will use tamper-evident packaging for meals that are delivered. And Grubhub Inc. GRUB, -17.41% has given consumers the option of “contact-less” delivery.
DoorDash has announced that it will suspend commissions for independent restaurants, and Grubhub has said that it is talking with mayors about a suspension.
UBS says there has been an uptick in demand for meal delivery. However, there are risks for some companies: “A prolonged disruption could have a more lasting impact on the restaurant supply, particularly for outlets mostly dependent on dining-in,” Hubert Jeaneau wrote in a note, saying that a shortage of drivers could be an issue, and forced restaurant closures could impact aggregators.
Target Corp. TGT, -3.35% has said that it is cutting operating hours, with all stores closing at 9 p.m. local time. And the first hour of operation on Wednesdays will be reserved for older shoppers, those with underlying health issues and other “vulnerable guests,” the retailer said.
Kroger Co. KR, +2.90% says it has activated a pandemic preparedness plan and began restricting the amount of high-demand coronavirus-related items to ensure that more customers get what they need.
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Home Depot Inc. HD, -13.62% announced on Wednesday that it would be cutting its store hours.
“Homeowners and businesses depend on The Home Depot for urgent needs such as hot water heaters, refrigerators, cleaning supplies, electrical and plumbing repairs, and harsh weather items like tarps, propane and batteries,” the home improvement retailer said in a statement.
Shutting stores for a period will help workers clean and sanitize them as well as restock items that are depleted by consumer demand.
Costco Wholesale Corp. COST, -0.78% has also seen a run on items that shows few signs of slowing. The warehouse retailer said Tuesday that is acquiring Innovel Solutions, what it describes as a “middle mile and final mile delivery and installation business” from Transform Holdco for $1 billion.
Transform Holdco is the company behind the Shop Your Way social shopping program for Sears, Kmart and other retailers. TransformCo, which currently operates about 500 retail properties and supporting facilities, says it will shutter additional stores and focus on the Kenmore and DieHard brands.
“Having full control of Innovel’s 11 distribution/fulfillment centers and 100-plus final-mile cross-dock centers will allow Costco to build its presence in ‘big and bulky’ items like major appliances, fitness equipment, mattresses, grills, etc.,” wrote UBS in a Wednesday note. Analysts think this purchase should help with Costco’s e-commerce business.
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Moreover, analysts suspect that Costco has seen its membership numbers rise due to the coronavirus pandemic.
“To put some perspective around this, if each of Costco’s U.S. warehouses gained a 10% increase in members, we estimate it would translate to an additional ~3.5-to-4 million members,” UBS said.
“If we assume these members spend 5% more than its current base, this alone implies an ~11% lift to Costco’s U.S. comp.”
Walmart stock has gained 3.5% in Wednesday trading and rallied nearly 24% for the past year. Kroger shares are up 4.3% on Wednesday, and have gained 40.7% for the last year.
Target stock is up 30.6% for the last 12 months. Home Depot stock is down 19.1%. And Costco shares have jumped 29.1% for the period.
The Dow Jones Industrial Average DJIA, -9.12% has slumped nearly 26% for the period.
