Tag: Walmart Inc. (WMT)

3 Stocks to Invest in Before the Housing Market Crashes

Posted on by The INO.com Team

 

The housing market might crash in the near term as mortgage demand remains under pressure because of low housing inventory and high-average 30-year fixed mortgage rates.

Homebuyers locked into the sub-5% pandemic-era mortgage rates simply aren’t selling. The total number of homes on the market for the four weeks ending September 3, 2023, has declined 18% year-over-year, registering the biggest decline since February 2022. Meanwhile, new listings fell 9.3%.

Prospective home buyers have also been thwarted by rising property prices, which have increased for five months in a row. According to the National Association of Realtors (NAR), more than half of U.S. metro areas registered home price gains in the second quarter of 2023. It also reported that the median sale prices of existing homes are near record highs.

Last month, mortgage rates climbed to their highest level in 23 years. Mortgage rates have risen as the Federal Reserve undertook aggressive interest rate hikes since last year to curb high inflation. The weekly average of the 30-year fixed-rate mortgage as of September 7, 2023, stood at 7.12%.

The high mortgage rates led to mortgage applications reaching the lowest level since 1996. According to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending September 1, 2023, mortgage applications fell 2.9% compared to the prior week.

MBA’s Vice President and Deputy Chief Economist Joel Kan said, “Mortgage applications declined to the lowest level since December 1996, despite a drop in mortgage rates. Both purchase and refinance applications fell, with the purchase index hitting a 28-year low, as prospective buyers remain on the sidelines due to low housing inventory and elevated mortgage rates.”

Freddie Mac’s chief economist Sam Khater said, “The economy remains buoyant, which is encouraging for consumers. Though inflation has decelerated, firmer economic data have put upward pressure on mortgage rates, which are straining potential homebuyers in the face of affordability challenges.”

Although nonfarm payrolls increased by 187,000 in August, the unemployment rate was 3.8%, up surprisingly from 3.5% in July. If unemployment keeps rising, it could lead to missed mortgage payments and foreclosures. With skyrocketing mortgage rates, high housing prices, and the possibility of a recession between now and July 2024 at 59%, a housing market crash is highly likely.

In the event of a housing crash, defensive stocks such as Walmart Inc. (WMT), American Water Works Company, Inc. (AWK), and Eagle Materials Inc. (EXP) will likely help cushion one’s portfolio. The products and services these companies provide are always in demand, irrespective of the economic cycles.

Let’s discuss these stocks in detail.

Walmart Inc. (WMT)

WMT engages in the operation of retail, wholesale, and other units worldwide. The company operates through three segments: Walmart U.S., Walmart International, and Sam's Club. 

WMT’s revenue grew at a CAGR of 5.2% over the past three years. Its EBITDA grew at a CAGR of 3.3% over the past three years. In addition, its EBIT grew at a CAGR of 4.6% in the same time frame.

In terms of the trailing-12-month Return on Common Equity, WMT’s 17.87% is 58.5% higher than the 11.28% industry average. Its 5.50% trailing-12-month Return on Total Assets is 28.1% higher than the 4.30% industry average. Likewise, its 2.51x trailing-12-month asset turnover ratio is 176.2% higher than the industry average of 0.91x.

WMT’s total revenues for the second quarter ended July 31, 2023, increased 5.9% year-over-year to $161.63 billion. The company’s adjusted operating income rose 8.1% over the prior-year quarter to $7.41 billion.

In addition, its consolidated net income attributable to WMT increased 53.3% over the prior-year quarter to $7.89 billion. Also, its adjusted EPS came in at $1.84, representing an increase of 4% year-over-year.

Analysts expect WMT’s EPS and revenue for the quarter ending October 31, 2023, to increase 0.7% and 4.5% year-over-year to $1.51 and $158.22 billion, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 19.2% to close the last trading session at $164.52.

American Water Works Company, Inc. (AWK)

AWK provides water and wastewater services. It offers water and wastewater services to approximately 1,600 communities in 14 states, serving approximately 3.4 million active customers. The company serves residential customers; commercial customers, including food and beverage providers, commercial property developers and proprietors, and energy suppliers; fire service and private fire customers; etc.

AWK’s revenue grew at a CAGR of 3.1% over the past three years. Its net income grew at a CAGR of 11.9% over the past three years. In addition, its EPS grew at a CAGR of 10.9% in the same time frame.

In terms of the trailing-12-month gross profit margin, AWK’s 58.97% is 51.7% higher than the 38.86% industry average. Its 22.08% trailing-12-month net income margin is 133.6% higher than the 9.46% industry average. Likewise, its 10.35% trailing-12-month Return on Common Equity is 19% higher than the industry average of 8.70%.

For the fiscal second quarter ended June 30, 2023, AWK’s operating revenues increased 17.1% year-over-year to $1.10 billion. Its operating income rose 32.1% year-over-year to $432 million. The company’s net income attributable to common shareholders increased 28.4% over the prior year quarter to $280 million. Also, its EPS came in at $1.44, representing an increase of 20% year-over-year.

For the quarter ending September 30, 2023, AWK’s EPS and revenue are expected to increase 0.2% and 7.3% year-over-year to $1.63 and $1.16 billion, respectively. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past six months, the stock has gained 2.9% to close the last trading session at $137.56.

Eagle Materials Inc. (EXP)

EXP manufactures and sells heavy construction materials and light building materials. It operates in four segments: Cement, Concrete and Aggregates, Gypsum Wallboard, and Recycled Paperboard. The company engages in the mining of limestone for the manufacture, production, distribution, and sale of Portland cement; grinding and sale of slag; and mining of gypsum for the manufacture and sale of gypsum wallboards.

On May 3, 2023, EXP announced the completion of the acquisition of Martin Marietta’s cement import and distribution business in Northern California, including a cement terminal in Stockton, California. The acquisition bodes well for the company as it will help extend and strengthen its distribution reach across its heartland U.S. cement manufacturing system.

EXP’s President and CEO, Michael Haack, said, “Our Nevada Cement operations have long-standing customer relationships in Northern California, and this acquisition will uniquely position us to better serve these and new customers with complementary imported product.”

“Our entire cement system is currently ‘sold out’, and this acquisition will enable us to more actively participate in the strong US demand environment. Our experience as a cement importer elsewhere in the US is a transferrable expertise at Eagle, and we expect a smooth ownership transition,” he added.

EXP’s EBIT grew at a CAGR of 24.4% over the past three years. Its net income grew at a CAGR of 56% over the past three years. In addition, its levered FCF grew at a CAGR of 54.7% in the same time frame.

In terms of the trailing-12-month net income margin, EXP’s 21.82% is 230.7% higher than the 6.60% industry average. Its 13.32% trailing-12-month levered FCF margin is 269.3% higher than the 3.61% industry average. Likewise, its 34.36% trailing-12-month EBITDA margin is 98.7% higher than the industry average of 17.29%.

EXP’s revenue for the first quarter ended June 30, 2023, increased 7.1% year-over-year to $601.52 million. The company’s adjusted net earnings rose 17.2% over the prior-year quarter to $126.15 million. Its adjusted EPS came in at $3.55, representing an increase of 25.9% year-over-year. Also, its adjusted EBITDA increased 16.4% year-over-year to $214.29 million.

Street expects EXP’s EPS and revenue for the quarter ending September 30, 2023, to increase 13.5% and 4.9% year-over-year to $4.24 and $634.84 million, respectively. Over the past year, the stock has gained 48.4% to close the last trading session at $180.19.

Investor Alert: Are These 11 Back-to-School Stocks Making Big Moves?

Posted on by The INO.com Team

The end of summer and the onset of fall usually mean one thing in the United States — it’s time to replenish supplies and head back to school. This also translates to wardrobe refreshes and gadget upgrades. The average planned back-to-school spending per household in the United States has gradually increased year-over-year to $848.9 in 2021, with electronics or computer-related equipment emerging as the biggest category.

While stressed American consumers have been forced to go bargain hunting to squeeze out the maximum possible value from money for bare essentials so that more of it can be set aside in favor of outdoor experiences instead of manufactured goods, the trend is unlikely to be significantly impacted even by the seismic shifts in the consumption ecosystem.

In fact, since the supply chain disruptions in the aftermath of the pandemic, concern for stockouts has only pulled back-to-school sales have increasingly been pulled forward to the end of July, compared to the conventional peak during the beginning of August. Prime Week by Amazon.com, Inc. (AMZN) has also done its fair bit to catalyze that shift.

Given the above, we have shortlisted a few relevant apparel/fashion/luxury, grocery, and technology stocks below that are expected to benefit from back-to-school sales to determine if they are worth buying in the aftermath of the sales event and ahead of the holiday season.

Apple Inc. (AAPL)

The technology and consumer electronics giant, which has a history of revolutionizing products like the personal computer, smartphone, and tablet, has begun scripting the next key chapter in its success story with the announcement of its first product in the AR/VR market, the Apple Vision headset, which will sell for $3,499 when it is released early next year.

Despite its 7.9% dip during the past month, AAPL’s stock has gained 22.2% over the past six months. While the business boasts excellent profitability, in view of its stretched valuation in the face of frigid trade relations between the U.S. and China, AAPL’s manufacturing hub and key market, investors should wait for a better entry point.

Walmart Inc. (WMT)

Sam Walton, founder of the largest grocer in the world, built the company on a no-frills approach aimed at making groceries and other products more affordable. With 60% of its revenue in the U.S. coming from the grocery segment, the retail giant’s focus on value through “everyday low prices” has helped it become relatively immune to the seismic shifts in the consumption ecosystem.

WMT’s stock has dipped slightly over the past month but has gained 11.7% over the past six months. With core PCE at 4.3%, indicating stretched budgets and high borrowing costs in the foreseeable future, WMT is best positioned to capture the upside from “modest improvement” in sales of big-ticket and discretionary items like electronics during the Back-to-School season.

Target Corporation (TGT)

TGT sells an assortment of general merchandise and food items to its guests through its stores and digital channels. With product categories such as apparel and accessories, beauty and household essentials, food and beverage, and home furnishing and décor, the budget retailer has converted its 1900+ stores into mini-malls offering a range of “cheap chic” items.

Due to the recent miss in revenue and a not-so-optimistic outlook for the holiday season, TGT’s stock has lost 9.5% over the past month. However, the slump has also brought the stock to a more attractive valuation, which could protect investors from downside risks and a potential upside from a mid-term recovery in consumer confidence and market sentiment.

Ross Stores, Inc. (ROST)

ROST operates two brands of off-price retail apparel and home fashion stores, Ross Dress for Less (Ross) and dd’s DISCOUNTS, with the latter offering in-season, name-brand apparel, accessories, footwear, and home fashions for the entire family at savings of 20% to 70% off department and discount store regular prices every day.

ROST’s shares have gained about 5% over the past month and 8.5% over the past six months. Given its healthy profitability, investors could consider buying the stock to capitalize on a rally during Back to School and the holiday season.

Dollar General Corporation (DG)

As a discount retailer, DG offers merchandise, including consumable items, seasonal items, home products, and apparel.

DG’s stock has plummeted 7.4% over the past month and 27.6% over the past six months. In view of its bleak prospects, investors are advised to stand by until sentiments improve before investing in the stock.

Logitech International S.A. (LOGI)

Headquartered in Lausanne, Switzerland, LOGI designs, manufactures, and markets products that connect people to working, creating, gaming, and streaming worldwide. The company offers accessories, such as mice, keyboards, webcams, and other accessories for mobile devices. The company sells its products under the Logitech, Logitech G, ASTRO Gaming, Streamlabs, Blue Microphones, and Ultimate Ears brands.

Despite a 4.3% dip in the past month, LOGI’s shares have gained 24.2% over the past six months. While the business boasts excellent profitability, investors could wait for the pendulum of personal consumption to swing from services back in favor of high-ticket discretionary goods before buying into it.

Crocs, Inc. (CROX)

CROX designs, develops, and markets casual lifestyle footwear and accessories for women, men, and children, containing Croslite material, a proprietary, molded footwear technology. The company’s segments include North America; Asia Pacific; Europe, the Middle East, Africa, and Latin America (EMEALA); and the HEYDUDE Brand.

CROX’s stock has lost 7.8% over the past month. While the decently profitable business is well-positioned to benefit from increased expenditure on outdoor expenses, investors could wait for further valuation comfort before taking a long position in the stock.

Dillard's, Inc. (DDS)

DDS is a fashion apparel, home furnishings, and cosmetics retailer. The company’s operating segments include its retail department stores and a general contracting construction company.

DDS’ stock has gained 5.6% over the past month. Despite the recent price gains, its excellent profitability at a decent valuation means that investors could benefit from further upside in the stock.

Levi Strauss & Co. (LEVI)

The well-known apparel company designs and markets jeans, casual wear, and related accessories for men, women, and children under the Levi's, Signature by Levi Strauss & Co., Denizen, Dockers, and Beyond Yoga brands.

LEVI’s stock has lost 5.9% over the past month and 22.4% over the past six months. While the sentiment has been improving lately, investors would be wise to wait for its valuation to improve before deciding to add the stock to their portfolio.

Abercrombie & Fitch Co. (ANF)

As an omnichannel specialty retailer of apparel, personal care products, and accessories for men, women, and kids, ANF sells its offerings primarily through its digital channels, company-owned stores, and various third-party arrangements.

ANF’s stock has surged 26.3% over the past month and 68.3% over the past six months. Given its excellent track record and profitability, investors could consider investing in the stock.

Shoe Carnival, Inc. (SCVL)

SCVL is an omnichannel family footwear retailer that offers customers an assortment of dress, casual, and athletic footwear for men, women, and children.
SCVL’s stock has plummeted 15.9% over the past month. While valuations have become more attractive, investors are advised to wait for the outlook to improve before acquiring a stake in the business.

Walmart (WMT) vs. Costco Wholesale (COST) vs. Target (TGT): Navigating Inflation's Impact on Grocery Chains

Posted on by The INO.com Team

U.S. domestic consumption has been on a roller coaster ride over the past three years. People have gone from not being free enough to spend practically free money to spending like there’s no tomorrow.

That, in turn, led to a not-so-transitory inflation, the hottest since the 1980s, forcing the Federal Reserve to implement eleven interest-rate hikes in a span of 16 months, taking the benchmark borrowing cost to 5.25%-5.50%.

Meanwhile, with the pandemic firmly in the rear-view mirror, Americans have been going above and beyond to compensate for the years spent indoors trying to substitute real experiences with virtual ones.

However, with the stash of stimulus cash fast dwindling, average American consumers have been forced to go bargain hunting to squeeze out the maximum possible value from money, which has gotten dearer so that more of it can be set aside in favor of outdoor experiences instead of manufactured goods.

Consequently, they have been forced to trade down to budget-friendly retailers, leaving the businesses that offer something in between wrong-footed and stranded. Although budget retailers have lost sales from low-income consumers, that loss has been offset by increased business from the middle-income consumer segment.

However, not budget retailers are created equal. Hence, let’s take a closer look at three such retailers' varying fortunes and prospects.

Walmart Inc. (WMT) has been relatively immune to the seismic shifts in the consumption ecosystem, as discussed in our piece on June 22. Hence, despite closing 21 stores in 12 states and DC this year owing to poor financial performance being cited by the company, the big-box retailer surpassed Street expectations for both earnings and revenue for the second quarter of fiscal year 2024.

Encouraged by the strong performance, WMT also raised its full-year guidance. It said it now anticipates consolidated net sales will rise by about 4 to 4.5% in the fiscal year. It expects adjusted earnings per share for the full year will be between $6.36 and $6.46.

WMT’s e-commerce sales for the U.S. also jumped 24% year-over-year as customers bought more items from the company’s growing third-party marketplace and placed more orders for store pickup and delivery.

With the double-edged sword of inflation cutting both ways, while WMT attracted new and more frequent shoppers, including younger and wealthier customers looking for both convenience and value, the shift back to services is taking a bite out of sales of goods, particularly after a pandemic-fueled spending boom. Consequently, consumers have been buying fewer discretionary items, such as electronics and home appliances, and trading down for lower-priced items.

Since general merchandise prices have dropped compared with last year, WMT saw a “modest improvement” in sales of big-ticket and discretionary items like electronics and home goods during the quarter. According to the CFO, John David Rainey, the retailer also had fewer markdowns as the inventory was down by 5% at the end of the second quarter compared to a year ago.

Moreover, as food prices remained steady, and some staple grocery items have fallen, shoppers have been buying more fresh meats, seafood, and eggs, accounting for nearly 60% of the annual U.S. sales for the nation’s largest grocer.

Although consumers are facing newer challenges, such as the return of student loan payments, with the Back-to-School season getting off to a strong and early start and with stock price gains of more than 10% year-to-date, WMT is looking forward to the holiday season with cautious optimism.

Warehouse club Costco Wholesale Corporation (COST) found its famous $1.50 hot dog and soda combo back in the headlines as inflation bit harder to squeeze pockets further. The hot dog combo and its rotisserie chicken, whose price has been pegged at $4.99 since 2009, are the retailer’s loss leaders that lure in customers who are likely to buy other items as well.

This could be helpful, especially in times like these in which, according to CFO Richard Galanti, even COST’s relatively well-to-do members have been ditching pricier beef products for cheaper meats such as pork and chicken, while others are bypassing the fresh meat aisle entirely and opting for cheaper canned meat and fish products with longer shelf life. Even the retailer has been forced to restrict itself from handing out unlimited free samples to shoppers.

Ahead of its earnings release, analysts expect COST’s revenue and EPS for the fourth quarter of fiscal year 2023 to increase by 8.3% and 14.5% year-over-year to $78.05 billion and $4.82, respectively. As a result, its revenue and EPS for the fiscal would increase by 6.3% and 9.8% year-over-year to $241.23 billion and $14.58, respectively. That could lend momentum to the stock, which has gained more than 19% year-to-date.

At the other end of the spectrum, Target Corporation (TGT), which also caters to value-conscious shoppers, missed Wall Street’s sales estimate for the fiscal second quarter and consequently slashed forecasts for the year ahead. The company expects comparable sales to decline by about mid-single digits for the full fiscal year and earnings per share to range from $7 to $8, from a previously expected range of $7.75 to $8.75.

One of the reasons behind this bearish outcome and outlook could be the shifting patterns of consumer expenditure, which was redirected to prioritize groceries over discretionary items to make room for outdoor experiences.

As a result, TGT, which caters to a segment generally more affluent than that served by WMT and draws only about 20% of its yearly revenue from grocery, found its top line getting negatively impacted and even its online sales declining by 10.5% year-over-year. However, given the higher margins on non-essential items compared to those for food items, TGT’s quarterly EPS of $1.80 exceeded Street expectations of $1.39.

TGT is taking measures to stem the rot, including remodeling its digital experience in the next three months. The remodeled site would include different landing experiences, more personalized content, enhanced search functionality, ease of navigation, and other updates to bring more joy and convenience to our digital guests.

However, even as WMT has been experiencing a “modest improvement” in discretionary goods, such as blenders, hand mixers, and other kitchen tools in the second quarter, as some consumers cook more at home, TGT has not shared the same optimism.

With the Back-to-School season in its early days, sales of frequency categories, such as food and beauty items, have not been enough to offset weaker discretionary sales at the retailer, which has seen its stock price decline by more than 19% since the beginning of the calendar year.

Bottom Line

With increased borrowing costs expected to keep weighing on the economy in the foreseeable future, WMT is expected to keep benefiting from consumers’ shift to essentials, which could offset weaker clothing and electronics sales until a potential recovery at the beginning of the holiday season.

Meanwhile, in order to manage and improve slimmer margins from food items compared to general merchandise, WMT has been doubling down on initiatives to increase the efficiency of its operations through innovations in packaging and Artificial Intelligence (AI) and Machine Learning (ML).

Hence, given its stronghold on sales of low-margin and high-volume groceries and other essentials, shoots of recovery in discretionary expenditure, and ever-growing moat by figuring out what the customer wants to buy and how best to get it to them, WMT’s prospects appear to be the most promising of the three retail chains.

Will United Parcel Service (UPS) Stock Hold Strong Against Strike?

Posted on by The INO.com Team

Last month, United Parcel Service, Inc. (UPS) and the Teamsters union, representing 340,000 full-and part-time UPS employees, reached a tentative deal to equip more trucks with air conditioning systems. Under the agreement, UPS said it would add air conditioning to all larger delivery vehicles, smaller sprinter vans, and brown package vehicles purchased after January 1, 2024.

Existing vehicles wouldn’t get that upgrade, but they will have other additions like two fans and air intake vents.
However, negotiations broke down last week between UPS and its Teamster-represented workers, just weeks before their contract is set to expire on July 31.

Negotiations Collapse Between UPS and Teamsters

Talks between the shipping giant UPS and the union fell apart Wednesday last week, increasing the possibility of what would be one of the largest strikes in U.S. history. Representatives from UPS and the Teamsters failed to reach a deal on a new contract, blaming each side for walking away.
“Following marathon negotiations, UPS refused to give the Teamsters a last, best, and final offer, telling the union the company had nothing more to give,” the Teamsters said in a statement.

The union claimed that UPS “walked away from the bargaining table after presenting an unacceptable offer,” which the UPS Teamsters National Negotiating Committee “unanimously rejected.”

UPS, meanwhile, said in a statement, “The Teamsters have stopped negotiating despite historic proposals that build on our industry-leading pay. We have nearly a month left to negotiate. We have not walked away, and the union has a responsibility to remain at the table.”

“Refusing to negotiate, especially when the finish line is in sight, creates significant unease among employees and customers and threatens to disrupt the U.S. economy. Only our non-union competitors benefit from the Teamsters’ action,” UPS added while calling on the Teamsters to “return to the table to finalize this deal.”

No additional negotiations are scheduled, according to the Teamsters.

Last month, rank-and-file UPS Teamsters authorized a strike, and the union stated that UPS members would not work beyond the expiration of the current contract.

Union’s Demands

The Teamsters are fighting to win an agreement at UPS that “guarantees better pay for all workers, eliminates a two-tier wage system, increases full-time jobs, resolves safety and health concerns, and provides stronger protections against managerial harassment.”
UPS and the Teamsters have made some progress since negotiations commenced earlier this year. The two sides agreed on heat safety that UPS said would equip all newly purchased U.S. delivery vehicles with AC beginning January 1 next year.

Furthermore, both sides agreed to end a two-tier wage system for drivers, establish Martin Luther King Jr. Day as a full holiday, and end forced overtime on drivers’ day offs.

The union is still pushing to raise wages for part-time workers at UPS, with leaders pointing to the company’s increase in profits during the pandemic.
“It’s an extremely tough job. And when you talk about the part-timers, their part-time wage rate right now is about $16 per hour,” Teamsters General President Sean M. O’Brien said. “We want to establish a livable starting wage for part-timers, but also make sure we reward those part-timers who work through the pandemic.”

A Potential Strike by UPS Workers

Members of the Teamsters voted nearly 97% in favor of authorizing a strike to start on August 1 if there is no agreement in contract talks between the shipping company and the union.

Sean M. O’Brien said, “This vote shows that hundreds of thousands of Teamsters are united and determined to get the best contract in our history at UPS. If this multibillion-dollar corporation fails to deliver on the contract that our hardworking members deserve, UPS will be striking itself. The strongest leverage our members have is their labor and they are prepared to withhold it to ensure UPS acts accordingly.”

Regarding this, UPS said it remains confident that there won’t be a strike this time.

“The results do not mean that a strike is imminent and do not impact our current business operations in any way,” the company said. “We continue to make progress on key issues and remain confident that we will reach an agreement that provides wins for our employees, the Teamsters, our company and our customers.”

If a strike does happen, it would be the largest against a single employer in America’s history, as the package delivery company is the biggest unionized employer in the sector and is extremely crucial to the country’s economy.

The last time UPS workers went on strike was in 1997, which significantly damaged the company and the economy. A UPS strike by 185,000 workers brought the shipping giant’s operations to a standstill, costing it $850 million and sending some customers to its rivals.

The strike that lasted for 15 days slashed package deliveries, overwhelmed the United States Postal Service and FedEx Corporation (FDX), and majorly hurt businesses nationwide.

Will The Company and The Economy Take a Hit If a Deal Isn’t Made This Time?

UPS is one of the largest shipping companies in the United States, with a 2022 revenue of $100.30 billion. According to the global shipping firm Pitney Bowes, UPS shipped 5.2 billion U.S. parcels in 2022, representing approximately a quarter of all packages (21.2 billion) delivered nationwide.

Moreover, the shipping giant’s annual profits in the past two years are close to three times what they were pre-pandemic. UPS returned about $8.6 billion to shareholders in the form of dividends and stock buybacks in 2022 and forecasts another $8.4 billion for shareholders this year.

UPS claims it delivers nearly 6% of the country’s gross domestic product (GDP). The company plays a vital role in the smooth movement of goods the economy depends upon. That means if the UPS Teamsters go on a strike, there would be far-reaching implications for the economy, particularly the supply chain, which is still recovering from pandemic-related disruptions.

Moreover, these years since the pandemic have been a stark lesson to what happens to the economy when the supply chains are disrupted or don’t work as smoothly as expected and when a shortage of truck drivers and shipping containers causes massive delays and higher prices for various goods.
So, a strike now will likely cause a logistical mess for suppliers and businesses that rely on UPS, as it did in 1997. In decades since then, the volume of parcels shipped has considerably grown due to the surge in e-commerce, while other players, including Walmart Inc. (WMT), , have entered the industry.

As per Pitney Bowes, UPS delivers about 37% of America’s total parcel volume, which is an average of more than 21 million packages a day. The remaining parcel market comprises FedEx with 33%, the U.S. Postal Service with 16%, and Amazon Logistics with 12%.

In the last strike by UPS workers almost 25 years ago, rivals to the company benefited primarily. The U.S. Postal Service witnessed a $450 million increase in revenue in 1997, and FedEx received an additional 15% of the shipping volume. Even three months following the 15-day strike, UPS volume was down 2% from industry forecasts for the crucial holiday season.

Once the strike was over in 1997, the backlog of 90 million packages met employees. Also, thousands of employees opted not to return at all, even when UPS struck a deal with the Teamsters.

This time around, although there are more shipping alternatives than there were 25 years ago, still the smooth functioning of the U.S. economy is expected to get disrupted.

FedEx issued an advisory last Thursday that there will be limits to how many shipments will get accepted from businesses if a strike commences at UPS.
“In the event of an industry disruption, FedEx’s priority is protecting capacity and service for existing customers,” said FedEx in a memo sent to its sales force. “Over the last six months, we have been actively communicating with current and potential customers and urging them to transition business while capacity is available. Time is now running out.”

Most importantly, this strike would be a massive blow for UPS as it may struggle to recover the volume of packages it would lose to its competitors.

How Should Investors Approach This News?

Shares of logistics giant UPS are under immense pressure lately as clouds of a workers’ strike continue to brew. Investors are taking the threat of a possible strike seriously.

Several UPS insiders ditched their stock over the past year. The biggest single sale by an insider was made when the Executive VP and President of International, Kathleen Gutmann, sold $10 million worth of shares at $190 per share. UPS insiders didn’t buy any shares over the last 12 months.

Insiders own nearly 0.07% of the shipping company, currently worth about $114 million based on the recent share price.

In addition, Hendershot Investments Inc. lowered its stake in shares of UPS by 3.6% during the first quarter, according to the company’s most recent Form 13F filing with the Securities and Exchange Commission (SEC). After selling 2,626 shares of UPS, the investment fund owned 70,434 shares of the logistics company’s stock.

Investors are advised to approach UPS stock with caution as the potential strike of its workers might lead to a significant fall in the transportation company’s revenue and a sharp decline in its market share as it would lose its volume of packages to its rivals.

Bottom Line

With both sides having made some progress since negotiations started earlier this year, including reaching an agreement on heat safety and ending a two-tier wage system for drivers, the union is still pushing to raise wages for part-time workers at the company.
If, at worst, the agreement isn’t made, a massive strike by UPS workers could devastate the overall U.S. economy’s smooth functioning. Also, the logistics company would be at high risk of losing its market share to its competitors and witnessing a significant decline in revenue and earnings.

Analyzing Walmart Inc.'s (WMT) Progress in a Post-Pandemic Era and Amid Shifting Economic Dynamics

Posted on by The INO.com Team

In our posts on May 25 and June 14, when we discussed how inflationary pressures and online retail is altering brick-and-mortar stores in today’s economy and resulting in widespread store closures, we found budget retailers, such as Walmart Inc. (WMT)to be relatively immune to the seismic shifts in the consumption ecosystem.

However, on May 18, it was disclosed that the big box retailer would be closing 21 stores in 12 states and DC this year , with four stores in Chicago being the latest to join the list owing to poor financial performance being cited by the company.

These closures would extend the trend of WMT closing a handful of stores across various states each year, with the company saying that the stores are "underperforming" without specifics.

Such developments could understandably dampen investor sentiments and confidence and even trigger panic regarding the retailer's financial health. However, counterintuitively, in its earnings release for the first quarter of the fiscal year 2024, the big-box retailer surpassed expectations for both earnings and revenue, with sales rising by nearly 8%.

Encouraged by the strong performance, WMT also raised its full-year guidance. It anticipates consolidated net sales to rise about 3.5% in the fiscal year. It expects adjusted earnings per share for the full year will be between $6.10 and $6.20.
However, it does not mean that the retailing giant has been completely immune to the bite of inflation. In fact, like a double-edged sword, it has cut both ways.

As we have discussed in a previous article, on the one hand, WMT has attracted new and more frequent shoppers, including younger and wealthier customers, who are turning to Walmart for both convenience and value.

However, on the other hand, as inflation factors into Americans’ spending decisions, the shift back to services is taking a bite out of sales of goods, particularly after a pandemic-fueled spending boom.

Moreover, spending trends weakened as the quarter continued, with the sharpest drop after February. Chief Financial Officer John David Rainey attributed that, in part, to the end of pandemic-related emergency funding from the Supplemental Nutrition Assistance Program and a decline in tax refund amounts.

Consequently, consumers have been buying fewer discretionary items, such as electronics and home appliances, and trading for lower-priced items. WMT’s sales have also reflected the shift toward groceries and essentials, with the former accounting for nearly 60% of the annual U.S. sales for the nation’s largest grocer.

In fact, WMT’s grocery business helped to offset weaker sales of clothing and electronics, as sales of general merchandise in the U.S. declined mid-single-digits, while sales of food and consumables increased low double-digits.

Another bright spot for the retail giant has been growth in online sales, which jumped 27% and 19% year-over-year for Walmart U.S. and Sam’s Club, respectively. According to Rainey, curbside pickup and home delivery of online purchases fueled the growth.
However, the increase in volumes online and overall came at the cost of a year-over-year decline in the company’s first-quarter gross margin rate since food has slimmer margins than other merchandise.

In order to protect and preferably increase its margins, WMT has been doubling down on initiatives to increase the efficiency of its operations.
As digital transactions now constitute about 13% and growing of its total annual sales in the U.S., WMT is cutting costs by reducing packaging.
On June 1, in its push for greater sustainability and lesser waste generation, the company introduced new packaging by using paper mailers and technology that makes custom-fit cardboard boxes.

WMT will add made-to-fit technology in about half of its fulfillment centers and for customers at all of its stores by the end of the year. Moreover, the nation’s largest retailer will also allow customers to skip plastic bags when retrieving curbside pickup orders.

While, at scale, the company’s switch to paper mailers is expected to eliminate more than 2,000 tons of plastic from circulation in the U.S. by the end of January, the sustainability push can come with cost benefits.

For example, with made-to-fit packaging, each box requires less material and plastic air pillows that cushion an item— making truckloads more efficient. The box changes also reduce labor for workers who previously made and taped the containers by hand. As a result, the company can realize significant savings in energy and workforce costs.

In its push for greater efficiency, WMT has also been leveraging Artificial Intelligence (AI) and Machine Learning (ML) by deploying them to improve both the customer and employee experience by figuring out what the customer wants and how best to get it.

For instance, one autonomous floor scrubber travels around in each store, keeping floors clean and free of debris while capturing, in real-time, images of more than 20 million photos of everything on the shelves daily with inventory intelligence towers.

WMT has trained its algorithms to discern the different brands and their inventory positions, taking into account how much light there is or how deep the shelf is, with more than 95% accuracy. Therefore, when a product gets to a pre-determined level, the stock room is automatically alerted so that the item is always available.

According to Anshu Bhardwaj, senior vice president of tech strategy and commercialization at WMT, employee productivity has increased by 15% since deploying this AI last year.

Moreover, for years, WMT has also been leveraging the vast amount of data generated by its ever-increasing online traffic to optimize its shopping app with the help of AI.

Given the optimization levels the retail giant is achieving in its internal processes through the proactive deployment of technology, it’s unsurprising that it is laying off hundreds of employees at e-commerce facilities nationwide.

WMT has confirmed eliminating hundreds of jobs at five fulfillment centers in Pedricktown, New Jersey; Fort Worth, Texas; Chino, California; Davenport, Florida; and Bethlehem, Pennsylvania.

Bottomline

In order to immunize itself from the risk of getting disrupted, the country’s largest retailer has embraced what Joseph Schumpeter has aptly described as creative destruction.

While it could mean continual realignment for its workforce, WMT shows promise as an investable and future-ready business.