The retailers made moves this week to adapt to a shifting landscape, but we see Macy’s as still likely to fall behind. Plus, Disney makes a bet on streaming.
Jeremy Glaser: Macy’s soars, Disney boosts its streaming credentials, and Wal-Mart looks to expand its online presence. This time on the Morningstar Weekly Wrap.
Macy’s plan to shut stores and better-than-expected results sent shares soaring on Thursday. But will this plan be effective?
Bridget Weishaar: Macy’s announced their second-quarter earnings and they surprised on the upside. First, the trend in sales improved versus the first quarter, and second they announced that they were shuttering 100 stores in the next year. We think that the decision to shutter the stores was a smart one and will improve the profitability as well as generate cash as they will likely sell some owned stores. In terms of the sales trend--we acknowledge that this is a positive shift and that sales are recovering, but we think that this is due to short-term headwinds that are starting to ease, including weather and a lack of new trends in apparel. In the long term we still expect the company to underperform the total retail sector because we see likely shifts in share towards e-commerce and other competitors that choose to compete on price.
Glaser: Disney made a $1 billion investment to gain another foothold in the streaming video world. And we see the shares as undervalued today.
Neil Macker: Disney posted a slightly better-than-expected fiscal third quarter, with strong studio results offsetting weak media network results. The firm also announced its widely rumored investment in BAMTech, purchasing 33% of the firm for $1 billion.
Revenue increased by 9% year over year to $14.3 billion. The revenue growth was led by studio entertainment, which improved by 40%. The 6% growth in parks and resorts reflected the impact of pre-opening revenue from the Shanghai resort, which opened its doors on June 16. Management remains upbeat on the park, which largely received positive reactions from both local press and social media.
The $1 billion investment in BAMTech provides Disney with a minority stake of 33%, along with the option to buy the remainder of the firm. BAMTech is one of the leading online live-streaming companies and currently operates the online platforms for HBO Now, the NHL, the PGA, and the WatchESPN app.
We are maintaining our wide-moat rating and our fair value estimate of $134 for Disney. With the stock trading in the 4-star range, it may offer an attractive entry point for investors with a longer-term investment horizon.
Glaser: Wal-Mart made an M&A splash this week by spending over $3 billion on jet.com. Will this help the retailer take on Amazon?
Ken Perkins: We maintained our $75 fair value estimate for Wal-Mart following the company’s acquisition of Jet.com and we see shares as fairly valued at current levels as investors have come to appreciate the stability of Wal-Mart’s grocery business. We do think that the acquisition of Jet makes sense for both companies. Jet.com has been very good at coming up with algorithms and pricing techniques that cause customers to buy larger basket sizes, which is something that Wal-Mart needs, particularly in groceries. At the same time, Wal-Mart can lend Jet its scale and its purchasing power in the grocery category, and overall we think that the business makes more sense in the hands of Wal-Mart than in a competitor like Amazon, which is really trying to challenge Wal-Mart in all of its categories. So over the long run, we still think that Wal-Mart has a long way to go to compete in the online channel, but we think that Jet has the ability to help the company really grow out its online revenue and compete with the likes of Amazon in the future.
Glaser: And this week on Morningstar.com, Christine Benz shared her top six dividend traps.
