The Ratings Game: HSBC says Walmart best retailer it covers: ‘Size matters in retail’

by | Sep 22, 2023 | Stock Market

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. Analysts assigned Walmart
a buy rating and Dollar General
a reduce rating, equal to sell. It assigned Costco Corp., Home Depot, Kroger’s Inc., Lowe’s Inc. and Target Co. a hold rating.

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. 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. “In our view, retailers with the best offline-to-online, or O2O, strategies will be the leaders in this environment,” said analysts Daniela Bretthauer and Guilherme Domingues.

HSBC report

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’s based on the amount of travel — and especially international travel — that was recorded this summer, the first in which people were comfortable flying long distances again. “With 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,” the report said. Some discretionary goods, such as furniture, building materials and electronics, enjoyed “pulled-forward” 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. As high inflation squeezes household budgets, consumers are spending more carefully, but of course, groceries remain a priority. That makes Walmart a top pick for the analysts, who praised its “superior O20 strategy, sheer size, and attractive growth story with operating profits growing at a faster pace than sales.” “Size matters in retail,” 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. 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 retaile …

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