Think Retail Is Making A Comeback? Citi Suggests O'Reilly And Walmart

Is retail making a comeback? It may be too early to say, but analysts at Citi at the very least expect concerns to "subside in a meaningful way" in 2018.

The Analyst

Citi's Kate McShane and Geoffrey Small.

The Thesis

The tremendous growth of e-commerce and the rise of Amazon.com, Inc. AMZN struck fear in retail investors, the analysts said in a note. But heading into 2018, these concerns will "subside" and there's a path for retailers to gain competitive ground against Amazon by:

• Investing in supply chain, labor and store remodels in a meaningful way;
• Positioning a store as an asset;
• Price has no longer become a baseline for competition; and
• Providing a better overall shopping experience even if selling in similar categories as Amazon.

Related Link: So Long, Wal-Mart Stores: Hello, Walmart

Top Pick: O'Reilly Automotive

O'Reilly Automotive Inc ORLY ranks as Citi's top retail pick for 2018 given a favorable set up, easier year-over-year comparisons and favorable industry dynamics. The company remains the "strongest" auto parts retailer based on its management team, ability to execute, and favorable product mix.

O'Reilly Automotive should gain market share in the auto parts space as it continues to open new stores and maintain its competitive advantage through supply chain investments, the analysts said. As such, the company should be able to grow its EPS by around 12 percent based on a 5 percent sales growth, 3.0 percent comp growth, 40 basis points of EBIT expansion, and ongoing share buybacks.

The stock looks "attractively valued" at just 16 times the analysts' 2019 EPS estimate, which is below the stock's three-year average multiple of 21 times.

Related Link: RBC Repairs Thesis On O'Reilly Automotive

Second Pick: Walmart

Wal-Mart Stores Inc WMT ranks second among Citi's analysts in the retail sector. In fact, the firm upgraded Walmart's stock form Neutral to Buy. The ongoing "aggressive" omni-channel strategy will continue generating significant sales growth and the online platform will emerge as a "true challenger" to Amazon. Citi also thinks a focus on groceries, everyday low prices, and the integration of physical stores with online selling will ensure consistent traffic trends.

Looking forward to the coming year, the analysts are modeling Walmart to grow its EPS by 3.8 percent year-over-year to $1.35 (in-line with the Street) on a same-store sales growth of 2.5 percent (versus the Street's 1.9 percent). The company is also expected to announce an increase to its dividend and a potential tax reform plan would give management additional cash to invest in its various initiatives.

Price Action

Shares of O'Reilly were unchanged early Tuesday morning, but are down 11 percent since the start of 2017.

Shares of Walmart gained nearly 2 percent early Tuesday morning and are higher by more than 40 percent since the start of 2017.

Photo from Wikimedia.