Amazon, Walmart, Costco: Which share price to back in golden quarter finale?

Christmas is just around the corner, and the world’s biggest retailers, including names like Amazon [AMZN], Walmart [WMT], Costco [COST] and Alibaba [BABA], are all hoping consumers will spend big on food, gifts and even their own personal needs in the run-up to the end of the year.  

The National Retail Federation is certainly giving them confidence, estimating that US consumers could spend as much as $730.7bn over the holiday period, an increase of up to 4.2% on last year’s figures. Positive news for retail share prices then?

Meanwhile, The University of Michigan’s consumer sentiment index recorded another increase in November, its third in as many months. According to the authors of the report, personal spending will be energised by favourable evaluations by consumers of their personal financial situation, and the renewed appeal of price discounting.

However, not all the data gives cause for celebration. The likes of Amazon, Alibaba, Costco and Walmart will have been disappointed to note that the Conference Board’s Consumer Confidence Index decreased in November (for the fourth consecutive month), although the news that overall confidence levels remain relatively high is certainly cheering.

“The decline in the Present Situation Index suggests that economic growth in the final quarter of 2019 will remain weak” - Lynn Franco, senior director of economic indicators at The Conference Board

“The decline in the Present Situation Index suggests that economic growth in the final quarter of 2019 will remain weak,” said Lynn Franco, senior director of economic indicators at The Conference Board. “However, consumers’ short term expectations improved modestly and growth in early 2020 is likely to remain at around 2%. Overall, confidence levels are still high and should support solid spending during this holiday season.”

Retail share prices to watch

One of the most interesting retail stock comparisons at present is between Amazon and Alibaba; the latter has seen its share price rise over the last 12 months, increasing 42.4% year-to-date.

Alibaba is under pressure to keep growing rapidly – and it appears to be meeting the challenge. Its most recent quarterly results showed year-on-year revenue growth of 40% and profit margins remain higher than those of Amazon.

Expectations for Amazon’s holiday sales, meanwhile, are lower than many had hoped for, despite the massive investments the company has made in its next-day delivery service, which had previously bolstered trader sentiment. 

Scheduled for the 12 December, the next earnings release from Costco – which was trading at $299.81 as of 29 November, up 44% YTD – is expected to be good news. The retailer is expected to report an increase of more than 6% in earnings per share compared to last year, thanks in part to its successful expansion into China, which may even lead earnings growth to exceed rivals such as Walmart.

Walgreen’s share price [WBA] of $59.60 as of 29 November’s close has been impacted by reports that private equity firm KKR is set to purchase the company in what has been described as potentially the largest leveraged buyout in history. Since 11 November, when reports initially emerged, Walgreen’s share price has dropped nearly 5%.

However, David Trainer of New Constructs has recommended that investors look to buy this stock ahead of its fiscal 1Q20 earnings report on 18 December, suggesting that the company’s 2019 earnings were understated by 15%.

Big beasts of retail slug it out online

In our previous assessment of Walmart and Amazon’s ecommerce capabilities, we reported that the former’s most recent earnings report provided an upbeat outlook for the holiday season, even though sales were slightly lower than expected.

As of 29 November, both are trading at high prices – Walmart at $118.17 is close to its year-to-date high, while Amazon at $1775.78 is trading in the middle of its 52-week range. But when looking at share price growth in the year-to-date, Walmart takes the lead, having shot up 26.6% compared to Amazon’s share price growth of 15.5%. 

Online grocery shopping is set to be the next major battleground for Walmart and Amazon in particular. Consumers in the US have trailed behind their counterparts in Europe when it comes to buying their food over the internet, but preferences are changing.

Research published by Bain & Company and Google earlier this year found that just 3% of US consumers regularly bought their groceries online. But their report predicts e-commerce penetration will at least triple over the next decade. They suggest that grocers that can deliver higher levels of convenience through online grocery shopping and shape consumers’ digital habits, will be provided a rare opportunity to edge out other heavyweight competition.