By Barbara Thau
NEW YORK–Wal-Mart is poised to “get its mojo back,” J.C. Penney could temper its most ambitious expansion plan in years and Target will finally shed its credit business, according to a Citigroup report.
The investment firm offered a forecast for the year in its report, Ten Predictions and Top Picks for 2008, taking the pulse of discounters, department stores and drug chains.
Wal-Mart is one of Citigroup’s top stock picks for 2008. Not only is the sluggish economy playing into the low-price retailer’s sweet spot, but merchandising improvements in areas such as home and direct sourcing should also fuel gains, the report said.
“We believe that investors should buy Wal-Mart at current levels, as a slowdown in the economy should increase the appeal of Wal-Mart’s one-stop shopping format and everyday low-price strategy,” the report said.
What’s more, “we expect the company’s merchandise initiatives to drive improved sales in home and apparel. Wal-Mart’s merchandising team is now deeper and more focused, with a merchant aligned to each key product area.”
Wal-Mart’s move to enhance its direct-sourcing business should also steamroll merchandising gains, the report said.
At Wal-Mart’s archrival Target, a “potential credit sale is imminent. … We believe that Target management was originally looking for a price that was right for them,” the report said. “However, with the challenging credit market, we think the company may be willing to adjust its expectations to get a deal done.”
Citigroup theorizes that if Target sheds its credit arm, it will reduce the perceived risk in its stock.
Although the retailer has embarked on its most aggressive store opening plan in years, J.C. Penney could be among the merchants who are tempering square footage growth this year, the report said.
The retailer, which set plans to open 50 stores in 2008, could shift some of those store openings into 2009, while the 50 store openings for 2009 could also be “pushed out further.”
And more store closings could be on the way at Macy’s, the report said. In December, Macy’s outlined plans to close nine stores.
Citigroup also foresaw that Macy’s would consolidate its operating divisions. Just weeks ago, Macy’s set plans to consolidate three divisions, cutting approximately 2,300 positions in a bid to accelerate same-store sales growth and slash expenses.
U.K. retail giant Tesco—the world’s third-largest retailer—made its U.S. debut this year with its Fresh & Easy supermarket format on the West Coast, and it is “a force to be reckoned with,” the report said. “The concept is strong enough to drive long term market share gains.”
The retailer is seen by industry watchers as a threat to Wal-Mart.
Tesco’s European stores sell home furnishings via its Tesco Extra format.
In the United States, the retailer’s next logical expansion would be on the East Coast. Fresh & Easy could swell to 10,000 stores “across the U.S.,” the report said.