Quick: Guess which two subindustry indexes in the Standard & Poor's Composite 1500 index have actually risen during this bear market? Correct, Brewers and HyperMarkets! The S&P 1500 HyperMarkets& Super Centers subindustry index, in which Wal-Mart (WMT) is found, has been on the High Momentum List for quite a few months. Its trailing 12-month price performances have been in the top 10% of all subindustries in the S&P Composite 1500 Index (consisting of the S&P 500, MidCap 400. and SmallCap 600 Indices). From Oct. 9, 2007 through Oct. 16, 2008, this sub-industry index was up 6.8%, vs. a 42.1% decline for the S&P 1500.
Take a look at the accompanying chart. As a reminder, the jagged blue line represents the subindustry index's rolling 52-week price performance as compared with the 52-week performance for the S&P 1500. Any point above 100 indicates market outperformance over the prior year, while points below 100 indicate market underperformance. The red line is a rolling 39-week moving average, while the two green bands indicate one standard deviation above and below the index's long-term mean relative strength.
There are three large- and mid-cap companies in the S&P 1500 HyperMarkets& Super Centers subindustry index, BJ's Wholesale Club (BJ), Costco Wholesale (COST), and Wal-Mart.
High Gas Prices Hurt
Joseph Agnese, who follows this subindustry for S&P, has a positive fundamental outlook for the hypermarkets and super centers group. He believes sales growth should improve in the second half of calendar year 2008 on progress from remodeling efforts, easing comparisons, and competitively priced offerings. In 2007, comparable store sales growth was pressured by increased pricing competition as traffic trends were weak due to high gasoline prices.
Hypermarkets and super centers reported improved year-over-year same-store sales growth in August. Wal-Mart posted a same-store sales increase of 3.0%, excluding fuel, in August, reflecting strength in food, pharmacy, and electronics. Meanwhile, club store operators experienced same-store sales growth in the upper single digits, excluding gasoline sales, on an acceleration in growth of transaction sizes, as traffic grew in the low-to-mid-single digits.
Agnese expects foreign currency exchange rates to no longer have the same beneficial impact for companies with international operations in late 2008, as comparisons became more difficult in the second half of the year. S&P expects club store operators' profitability comparisons to be difficult in 2008, as they will not experience the earnings benefits they did in 2007 from raising fees. Clubs raised membership fees beginning with renewal periods expiring in 2006 after not having boosted fees since 2000.
Not Sensitive to Changing Fashions
S&P believes that hypermarkets and super centers should generally appeal to price-sensitive consumers. Also, because of the extent that they sell such consumer staples as food and beverages, this should make their sales less sensitive to changing fashions than those of some other retailers. Agnese believes valuations for these retailers, with what S&P sees as their strong balance sheets and attractive mixes of consumables and basic merchandise, will benefit from a competitive pricing position and improved merchandising as economic growth slows in 2008.
So, there you have it. The group's favorable relative strength is supported by a positive fundamental outlook, in S&P's view. Of the names mentioned above, Wal-Mart is ranked 5 STARS (strong buy), while Costco and BJ's are each ranked 3 STARS (hold).