Raymond James Downgrades Value Retail Sector As Walmart Fuels Price Competition

Walmart Inc WMT is on the offensive with an increasingly competitive price strategy, and discounted retail could take a hit.

The Rating

Raymond James analyst Dan Wewer downgraded the following stocks from Strong Buy to Outperform:

• Big Lots, Inc. BIG, with a price target cut from $60 to $48;
• Dollar General Corp. DG, with a price target cut from $110 to $105; and
• Dollar Tree, Inc. DLTR.

The Rating

The downgrades were based on a comparative study of branded consumer goods.

“Our latest survey provides evidence that Walmart is reinvesting some of its tax savings into pricing as part of an effort to grow market share,” Wewer said in a Monday note. (See the analyst's track record here.) 

Walmart’s prices had previously been in line with Dollar General, but since February, it’s cut the value of traffic-generating products to create a 4.4-percent gap in the companies’ baskets, the analyst said. 

Big Lots, meanwhile, closed in on Walmart with a mere 1.9-percent cost disparity. Pricing initiatives in Big Lots' food segment helped it achieve the second least-expensive basket in Raymond James’ survey.

“Although Walmart’s aforementioned price gap is not yet alarming relative to Dollar General and Family Dollar, it does increase the risk for the value retailers,” Wewer said. 

Competitors are challenged to protect market share with margin-eating price cuts or protect margins while conceding comps. The problem compounds a hike in milk and egg prices.

Notably, Wewer remains bullish on Big Lots, Dollar General and Dollar Tree, as valuations are lingering below historical averages and the companies continue to beat drugstores in cost. Dollar General’s prices are 34 percent below those of CVS Health Corp CVS and 29 percent below Walgreens Boots Alliance Inc WBA, he said. 

Price Action

At the time of publication, Dollar Tree was up slightly at $97.25, Dollar General was up 0.22 percent at $96.49 and Big Lots down was up 1.62 percent at $42.71. 

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