Investment report an analysis of walmart, kroger, target dollar general

Threats of new entrants – STRONG New entrants, including both startups and brick-and-mortar retailers, are attracted to the online retail sector due to rapid growth, low costs, and mini

Introduction

The rationale for the report

Despite experiencing many difficulties due to the impact of the Covid-19 pandemic, the retail industry still shows its indispensable contributions to the United States’ development

The U.S retail industry is vital to the national economy, significantly impacting job creation and GDP In 2022, there were around 4.6 million retail establishments employing 32.2 million workers, which is a large segment of the national workforce These employees generated $1.3 trillion in direct labor income, highlighting the sector's economic contribution Additionally, the retail industry's influence on GDP is clear, with a contribution of $2.2 trillion to the nation's economic output, reinforcing its status as a key economic driver in the U.S (PwC, 2024).

In 2022, the U.S retail industry played a crucial role in the national economy, employing over 32 million workers and supporting an additional 23 million jobs in related sectors This strong employment foundation accounted for more than 25% of total U.S employment and nearly 20% of national labor income Additionally, the retail sector contributed $5.3 trillion to the GDP, highlighting its significant impact on overall economic output.

Global inflation is showing signs of slowing down, prompting some central banks to lower interest rates However, the economic recovery, particularly in the U.S., continues to encounter significant challenges, which in turn impacts the growth of the retail industry.

Central banks' aggressive monetary tightening to combat inflation has tightened financial conditions, leading to higher borrowing costs, especially for mortgages, and reduced credit availability This has negatively impacted corporate refinancing, investment, and real estate markets, resulting in an increase in corporate bankruptcies and a slowdown in business and residential investment across many economies The commercial real estate sector, particularly office markets, is under significant pressure due to these elevated borrowing costs and the shift towards remote work While recent declines in long-term interest rates and rising equity markets indicate some easing of financial conditions, overall borrowing costs remain high.

7 elevated compared to the pre-pandemic period, and real interest rates are on the rise even without nominal rate adjustments (IMF, 2024a) (Figure 1)

Figure 1.1: Central Banks’ Policy Rate (%)

Global growth is expected to hold steady at 3.2% for both 2024 and 2025, although this figure is below the historical average Despite an upward revision for 2024, factors such as restrictive monetary policies, fiscal tightening, and low productivity growth continue to hinder economic prospects Advanced economies, particularly in the euro area, are anticipated to see slight recovery, while the U.S is predicted to experience a slowdown in 2025 due to fiscal tightening and a softening labor market The global economy remains susceptible to various risks, including commodity price shocks, persistent inflation, financial instability, China's economic slowdown, fiscal challenges, and geopolitical tensions (IMF, 2024a).

The retail industry landscape will continue to change along with scientific and technological achievements

The retail landscape of 2024 is a complex interplay of traditional and digital commerce As e-commerce rapidly expands, brick-and-mortar stores continue to evolve Retailers are

Retailers are increasingly focused on enhancing customer and employee experiences at every touchpoint To meet current and future technological needs, they are prioritizing strategic network planning, construction, and optimization (Comcast Business, 2024).

The retail industry is rapidly evolving, requiring retailers to be proactive in response to market changes Success depends on a strategic combination of innovation, technology adoption, and operational efficiency Retailers must adapt to and shape emerging trends by investing in advanced technologies and strong connectivity This approach enhances customer experiences, optimizes operations, and fosters new business models The dynamic retail landscape offers significant opportunities for growth and transformation as retailers integrate customer and employee experiences through technological advancements.

Scope and objectives of the report

This report aims to analyze four U.S.-based retail companies, utilizing insights gained from Financial Statement Analysis and related subjects, to provide informed investment recommendations.

Prominent retail companies listed on the NYSE, including Walmart Inc., The Kroger Co., Target Corporation, and Dollar General Corporation, provide easily accessible financial information through annual reports In 2023, these companies ranked 1st, 4th, 7th, and 17th in global retail revenue, according to NRF 2024 Additionally, their fiscal year ends in late January or early February, ensuring a consistent assessment process.

With the goal of analyzing and making recommendations for the four selected U.S retail companies, the study will need to answer the following questions:

 To what extent do macroeconomic factors, encompassing political, economic, social, and technological forces, influence consumer choice of retailers?

The five competitive forces in the retail industry significantly impact the performance of firms by shaping their strategic decisions and market dynamics New entrants challenge established players, intensifying competition and potentially eroding market share Competitive rivalry compels firms to innovate and improve customer service, enhancing overall performance The presence of substitute products can sway consumer preferences, necessitating differentiation strategies Supplier bargaining power influences cost structures and product availability, affecting profitability Lastly, buyer bargaining power drives firms to offer better value propositions, ensuring customer retention and loyalty Understanding and navigating these forces are crucial for retail firms to thrive in a competitive landscape.

 Considering the financial health of the selected retailers and current market conditions, what investment strategies are most suitable for their stocks?

Methodology and structure of the report

This study employs a comprehensive top-down analysis, examining macroeconomic factors, industry dynamics, and company specifics in each chapter of the report Following this analysis, a company valuation is performed and compared to its market price, leading to informed investment recommendations The research framework is structured in accordance with the methodologies outlined by Palepu et al (2019).

Chapter 1 offers an overview of the research, highlighting the significance of the retail industry in the U.S and its global economic context, particularly within the framework of the 4.0 industrial revolution It outlines the research scope and objectives, which focus on analyzing four key companies in the U.S retail sector and providing investment recommendations based on the insights gained.

Methodology and structure of the report

Chapter 2 conducts a top-down analysis by evaluating the macro external factors impacting the selected companies, utilizing Aguilar's (1967) P.E.S.T assessment framework.

4 factors: politics (Politics/P), economics (Economy/E), society-environment

The interplay between society and the environment is increasingly influenced by advancements in technology, particularly within the public sector Research leveraging data and insights from reputable international organizations, such as the International Monetary Fund (IMF) and the World Economic Forum, highlights the critical role of sustainable practices in fostering economic growth and social well-being.

(WEF), Organization for Cooperation and Development Economic Development

(OECD), PricewaterhouseCoopers Auditing Company (PwC)…

 Chapter 3 : This chapter performs the second part of the top-down analysis which is to evaluate industry factors based on Five Forces analysis framework by Porter

(1979) The assessments use information and data from in-depth reports and outlook reports on the retail industry in the U.S and around the world

Chapter 4 concludes the top-down analysis by conducting a comprehensive financial analysis and valuation of each company, including a detailed Tearsheet This assessment evaluates the financial health through key indicators from the financial statements—business results report, balance sheet, and cash flow statement—while examining five ratio groups against industry averages To determine the intrinsic value, the report employs two valuation methods: price multiples and free cash flow, with assumptions grounded in the industry outlook discussed in Chapter 3.

 Chapter 5 : This chapter provides final assessments after completing the top-down

External environment analysis – P.E.S.T analysis

Political assessment

Geopolitical risks increase input costs, such as raw material costs, imported goods, etc., thereby affecting sales revenue and profits of retailers

Escalating geopolitical tensions in the Middle East and Eastern Europe threaten global economic recovery by increasing inflationary pressures and undermining confidence among businesses and consumers These developments could lead to trade restrictions, capital limitations, and reduced labor mobility, further fragmenting the global economy and disrupting supply chains Additionally, upcoming elections may intensify protectionist policies, reversing labor market gains and exacerbating shortages while escalating tariffs that harm both businesses and consumers (IMF, 2024a).

The upcoming U.S national elections bring significant uncertainty to economic policy for 2025 and beyond, with potential shifts in fiscal policy, regulations, immigration, and trade that could greatly affect growth, inflation, interest rates, and debt dynamics These changes may also have repercussions for other countries, particularly those with large current account deficits or heavy reliance on U.S exports, which could face severe negative impacts if the U.S strengthens its dollar and enforces stricter trade restrictions.

Tax policy of the U.S In the future, it will increase corporate income tax expenses, thereby reducing the after-tax profits of businesses, including retail businesses

The FY 2025 budget aims to increase the U.S corporate income tax rate from 21% to 28% and the corporate alternative minimum tax from 15% to 21%, while also raising the corporate stock repurchase excise tax from 1% to 4% These changes build on the 2022 Inflation Reduction Act and include additional tax measures for corporate and pass-through entities Key reforms propose raising the corporate tax rate on foreign earnings from 10.5% to 21%, introducing an undertaxed profits rule, and establishing a domestic minimum top-up tax Furthermore, the budget suggests higher individual income taxes, with the top rate increasing from 37% to 39.6%, ordinary taxation of capital gains for high earners, and a 25% minimum income tax for the wealthiest taxpayers.

Economic assessment

The recovery of the global economy, including the U.S., still faces many uncertainties, affecting consumption and thereby affecting the revenue and profits of retailers

Recent economic outlooks face heightened near-term risks, driven by ongoing inflation, especially in the services sector linked to wage-price dynamics and possible trade tensions Persistently high inflation may lead to prolonged elevated interest rates, worsening external, fiscal, and financial vulnerabilities The upcoming elections add to the uncertainty, raising concerns about fiscal irresponsibility, protectionism, and trade conflicts However, policies that encourage multilateralism and implement structural reforms have the potential to reduce these risks and promote global growth (IMF, 2024c).

U.S government fiscal deficit and debt remain elevated compared to pre-pandemic projections Despite a 2022 decline following pandemic-related spending, the 2023 deficit widened by 3.5% of GDP due to factors including lower tax revenues, higher interest costs, student loan relief, and increased income security spending While this fiscal loosening had a limited impact on aggregate demand, the federal deficit is expected to rise by 0.5% of GDP in FY2024, increasing the general government deficit by 0.2% of GDP Despite identified vulnerabilities in the U.S banking system in 2023, including supervisory lapses and risks from 2018 regulatory changes, concrete remedial actions remain scarce While proposals for enhanced capital requirements and supervisory processes exist, implementation is pending

To address these issues, the paper suggests fully adopting Basel III, subjecting banks over

$100 billion to stricter regulations, strengthening oversight, reassessing deposit insurance, and recalibrating liquidity standards to better withstand rapid deposit withdrawals and asset liquidation risks (IMF, 2024b)

Major central banks, including the Federal Reserve, are unlikely to ease monetary policies until inflation meets target levels, as significant delays in policy adjustments can lead to high capital mobilization costs, negatively impacting retailer profits.

In 2023, cash liquidity buffers for firms decreased significantly due to high interest rates, with 33% of small firms in advanced economies and 55% in emerging economies holding cash reserves below their interest expenses by the third quarter This situation is expected to deteriorate further, with projections indicating that these figures could rise to 38% and 59% respectively, increasing liquidity risks As a result, corporate bankruptcies, particularly among smaller firms, have surged in major economies, even as policy support has diminished (IMF, 2024d).

In the U.S., inflation declined during the latter half of 2023 However, despite this decline, inflation remains elevated Policymakers are cautious and seek greater confidence that

Inflation is expected to sustainably approach the 2% target before any reduction in the federal funds rate is considered, as current restrictive policies are putting downward pressure on economic activity and inflation Policymakers are closely monitoring data and evolving risks to guide their decisions, with further rate hikes appearing unlikely but adjustments based on comprehensive analysis remaining a possibility The gradual reduction of the Federal Reserve's securities holdings aims to alleviate stress in money markets as they reach an appropriate reserve level The Fed's forward guidance suggests a neutral policy rate by 2026, aligning with projected PCE inflation of 2% by mid-2025 However, due to the economy's overheated conditions and persistent inflation risks, it is prudent to delay policy easing until inflation firmly returns to the target Model simulations support this cautious approach, and should inflation risks increase, further tightening may be required, making it challenging to identify the neutral policy rate post-loosening due to pandemic-induced changes.

Social-environmental assessment

Changes in the labor market, including shifts in population structure, gender income inequality, and the rise of automation, significantly influence the costs and revenues of retail businesses, ultimately impacting their profitability.

The evolving job market, marked by rapid technological advancements and global disruptions, poses both challenges and opportunities Despite a generally negative employment outlook, job losses are concentrated, allowing for targeted interventions While skills shortages persist, their growth rate has slowed since the pandemic peak Businesses are increasingly implementing proactive workforce strategies to bridge talent gaps and foster transformation With 23% of jobs expected to churn in the next five years, a net loss of 14 million jobs (2%) will be offset by the creation of 69 million new positions Industry-specific turnover varies, with higher churn rates in the Supply Chain and Media sectors compared to Manufacturing and Retail High vacancy rates in Retail, Wholesale, Manufacturing, and Leisure, along with retention challenges, further contribute to labor market volatility A global survey reveals that 20% of employees are considering job changes, adding to this dynamic (WEF, 2023a).

Ensuring requirements for green growth and sustainable development increases costs related to this issue, thereby reducing the profits of retail businesses

In June 2023, the International Sustainability Standards Board (ISSB) launched its first standards, IFRS S1 and IFRS S2, aimed at enhancing sustainability disclosures for investors IFRS S1 outlines a general framework for sustainability-related information, while IFRS S2 focuses on climate-related disclosures, both aligning with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations Ahead of these standards, the IFRS Foundation began consultations for its two-year agenda, which will include new projects on biodiversity, human capital, and human rights Despite 86% of global market capitalization being represented by companies that disclose sustainability information, only 22% of listed companies engage in such reporting, indicating that larger firms are better positioned for compliance This gap highlights the necessity for adaptable sustainability disclosure frameworks that consider the diverse capabilities of companies, as the fixed costs of sustainability reporting may deter smaller firms from participating.

To address compliance challenges, standard-setters must focus on enhancing interoperability, which will alleviate burdens on organizations Furthermore, jurisdictions need to assess the costs associated with creating local reporting standards, as this could adversely affect comparability with global counterparts (OECD, 2024).

Technological assessment

Staying abreast of advancements in science and technology, including big data, machine learning (ML), and artificial intelligence (AI), enables retailers to reduce costs and enhance operational efficiency, ultimately leading to increased revenue and profits.

Generative AI is transforming the retail industry, with significant investments in AI, machine learning, and natural language processing on the rise According to IDC, by 2027, 95% of retailers are expected to leverage generative AI to enhance product information, improve customer service, and elevate the overall consumer experience.

AI-driven hyper-personalization is transforming retail by leveraging extensive consumer data to provide customized product suggestions and marketing communications, which improves customer experience, boosts conversions, and builds brand loyalty Additionally, Natural Language Processing, a key component of generative AI, facilitates effective customer support through chatbots and virtual assistants, both online and in physical stores, addressing inquiries and ensuring a smooth customer journey.

 AI applications in supply chain management encompass demand forecasting, inventory optimization, logistics streamlining, store layout enhancement, pricing

14 strategy, fraud detection, and route optimization, collectively aiming to reduce costs, waste, and delivery times while improving efficiency, security, and supply chain resilience

AI is set to transform the retail employee experience by enhancing customer engagement and streamlining supply chain management By automating routine tasks such as inventory control and offering real-time insights into customer behavior, AI enables employees to concentrate on more valuable interactions This shift not only boosts job satisfaction but also creates a more dynamic and engaging work environment.

In 2024, half of retail executives emphasize the importance of AI-driven personalization, yet only 50% express confidence in their AI capabilities As data collection grows, retailers face the challenge of balancing consumer trust with the delivery of personalized experiences Alarmingly, 80% of consumers report a lack of trust in retailers' practices.

AI use, and 75% of executives anticipate increased consumer concerns regarding privacy, surveillance, transparency, and job displacement with next-generation AI technologies (Deloitte, 2024a)

The advancement of science and technology poses significant challenges for retailers in managing complex systems, as they face increasingly sophisticated cyber attacks This escalating threat not only raises operational costs but also diminishes overall profits.

Rapid technological advancements are increasing the global population at risk of exploitation by organized crime networks, which are utilizing blended business models and new technologies to diversify their illicit revenue streams This shift presents substantial threats to individuals and legitimate businesses, potentially leading to heightened violence and state instability Cybercrime, especially phishing attacks enhanced by generative AI, has become a low-risk, high-reward opportunity for these criminal organizations.

As cyber defenses advance, those with limited digital skills and vulnerable infrastructure are increasingly targeted by cyber threats This growing trend, which is already significant in Latin America, is expected to spread to Asia, the West, and Southern Africa due to rising internet access and economic prosperity.

The integration of AI in retail is transforming IT infrastructure needs, as generative AI's resource demands require sophisticated networking and data management Retailers are leveraging edge computing to process data locally, which minimizes latency and boosts efficiency Additionally, software-defined networks improve agility by dynamically allocating bandwidth to ensure that essential AI applications have the resources they need while preserving overall network performance (Comcast Business, 2024).

Competitive dynamics of the retail industry – Porter’s Five

Competitive rivalry – STRONG

The U.S online retail sector is experiencing significant growth but remains fiercely competitive, characterized by numerous players and dominant market leaders The low barriers to entry and exit heighten competition, as companies aggressively vie for customers in an increasingly borderless marketplace.

Leading online retailers, like Amazon, utilize high sales volumes to achieve economies of scale, which leads to lower prices and enhanced customer service, allowing them to outpace smaller competitors Amazon's Prime membership, favored by 80% of subscribers monthly, exemplifies consumer preference for established platforms With a vast selection of over 370 million products across 35 departments, these giants not only offer diverse options but also mitigate risks and boost economies of scale While they face intense competition from foreign retailers with lower prices, factors such as customs duties and unfavorable exchange rates provide some protection for domestic retailers.

Multichannel retailers like Walmart, Apple, Costco, and Target are strong competitors in the U.S market due to their brand strength, economies of scale, and superior customer service provided through physical stores The option for in-store collection reduces packaging and delivery costs, offering a potential price advantage for both retailers and consumers As major retailers often sell similar products, this leads to intensified price competition, while niche players encounter a less intense but still significant competitive environment Prominent U.S retailers such as Macy's, JCPenney, Gap, and BestBuy wield considerable market power in specific segments and have largely fueled their growth through online channels in recent years.

High storage costs force online retailers to adopt shorter operating cycles, making efficient ERP and ICT systems essential for gaining a competitive advantage Large retailers that invest in these technologies and research and development to improve consumer experience are more likely to increase their market share Additionally, low fixed costs facilitate quick and low-capital expansion, heightening competition in the online retail sector However, the lower capital investment and fixed costs also lead to reduced exit barriers, which somewhat lessens competitive rivalry.

The U.S retail market is highly competitive, with Amazon's aggressive pricing strategy enhancing its market share while squeezing profit margins Traditional retailers like Walmart are responding by improving their logistics, implementing faster delivery options such as one-day urban and two-hour express delivery services Although online retail growth initially lessens competition, the intensity of rivalry will rise as market saturation occurs, driven by demand fluctuations linked to disposable income and consumer confidence.

Threats of new entrants – STRONG

The online retail sector is experiencing significant growth, drawing in new entrants like startups and traditional retailers due to its low costs and minimal barriers to entry This rapid expansion has prompted legal reforms in various countries to better support e-transactions, enhance consumer and privacy protections, and strengthen cybersecurity measures.

The online retail sector is experiencing heightened competition as new entrants, including both pure-play companies like Amazon and traditional retailers, respond to changing consumer preferences favoring e-commerce for its convenience and cost savings This trend presents substantial growth opportunities for businesses that are willing to adapt to the evolving marketplace.

Low entry barriers with minimal fixed costs and capital investment have driven the growth of online retail In 2022, electronics led the U.S market, accounting for 46.1%, followed by home and garden at 17.2% and apparel at 12.6% Even amidst competition from established brands, niche strategies can achieve significant success.

Online retailers can penetrate foreign markets without a physical presence, leading to increased competition However, challenges such as localization, extended delivery times, and elevated costs can impede international sales In 2021, online specialists represented 50.3% of U.S online retail, while larger retailers are merging online and offline channels, utilizing AI technology to improve consumer experiences and broaden their market reach, which may put smaller competitors at a disadvantage.

Advanced logistics and information and communication technology (ICT) play a vital role in the growth of e-commerce, with the U.S ranking 11th out of 158 nations in the UN's 2022 report The interdependent relationship between online retail and logistics highlights the need for supportive legal frameworks To foster this environment, countries should implement laws related to e-transactions, consumer protection, privacy, and anti-cybercrime, as demonstrated by the U.S.'s comprehensive four-pillar strategy enforced by the Federal Trade Commission.

Substitute products – MODERATE

Large retailers mitigate the substitution threat posed by traditional brick-and-mortar stores through a multichannel strategy In contrast, exclusively online retailers are more susceptible to direct substitution risks (Marketline, 2023a).

Catalog and brick-and-mortar retail provide essential alternatives to online shopping, catering to consumers who prefer the tactile experience of products, especially in categories like apparel and footwear Furthermore, concerns about the security of online transactions can lead customers to favor catalog shopping or in-store purchases.

Online retail has traditionally struggled with delivery times, giving an edge to brick-and-mortar stores; however, companies like Amazon have addressed this with one-day and same-day delivery options Price continues to be a significant factor in online shopping, with 81% of U.S consumers comparing prices before making a purchase In response, traditional retailers have adopted price-matching policies to compete This competitive landscape, intensified by showrooming, pressures physical stores, eroding their profitability as they attempt to retain customers attracted by lower online prices.

Large retailers are adopting a multichannel approach, which helps reduce the threat of direct competition from brick-and-mortar stores, while still serving as a complementary strategy This threat is mainly significant for online-only retailers A notable example is Amazon's introduction of Amazon Go in 2018, which has expanded to 29 cashierless stores across the U.S by 2022, showcasing the potential for online giants to enter the physical retail space.

Bargaining power of suppliers – MODERATE

Suppliers of differentiated products possess more power compared to those offering commodities, as their reliance on major retailers can greatly influence their revenue In contrast, retailers have limited dependence on individual suppliers The trend of suppliers integrating into online retail is intensifying competition, placing additional pressure on online retailers Furthermore, delivery service providers maintain significant bargaining power, especially since smaller companies often depend on third-party logistics, unlike larger retailers that have in-house delivery capabilities (Marketline, 2023a).

Online retail depends on four crucial supplier categories: logistics, packaging, ICT systems, and product manufacturing A strong ICT infrastructure is vital, enabling ICT providers to enhance efficiency Furthermore, major retailers typically seek large suppliers, which intensifies supplier power and concentration in the market.

Suppliers of specialized products, such as books and apparel, or high-quality consumer electronics, typically wield more bargaining power than commodity suppliers, particularly when they represent well-known brands.

Suppliers often sell to various retailers, which helps diversify their revenue and enhance their bargaining power; however, their reliance on major retailers like Amazon significantly impacts their operations On the other hand, large internet retailers source products from multiple suppliers, which diminishes their dependence on any single vendor and effectively lowers the power of suppliers.

Online retail offers lower operational costs and reduced staffing needs compared to traditional stores, attracting more suppliers and intensifying competition Furthermore, platforms like eBay empower small producers to sell directly to consumers, which reduces the bargaining power of online retailers.

Despite the strong in-house delivery capabilities of major online retailers, third-party logistics are essential for efficient operations This sector, led by influential companies such as FedEx, UPS, USPS, and DHL, is experiencing significant disruption Amazon's growing fleet of planes, trucks, vans, and ships is set to establish it as the largest delivery service in the U.S.

In-store pickup and collection points provide alternatives to courier services; however, home and workplace delivery is still the favored option for consumers Delivery challenges such as delays, missing items, and high costs significantly affect online sales, highlighting the need for efficient and cost-effective logistics solutions Furthermore, the expenses associated with packaging material suppliers represent a considerable overhead that impacts overall business costs.

Bargaining power of buyers – MODERATE

The rise of digital tools has significantly improved consumer knowledge, empowering buyers and fueling e-commerce growth due to greater internet access and digital literacy This transformation not only advantages online retailers but also allows consumers to participate as sellers in the digital marketplace (Marketline, 2023a).

Retail buyers generally have limited bargaining power, a situation that is increasingly affected by the rise of online shopping, which is becoming a crucial aspect of consumer behavior The extent of online retail varies worldwide, shaped by factors such as internet access, digital literacy, and financial inclusion With an average household net-adjusted disposable income per capita of $51,147, surpassing the OECD average, consumers are demonstrating a greater ability to spend on both online and offline purchases.

The rise of internet access and the widespread use of digital devices have significantly empowered consumers by providing them with easy access to information, research tools such as price comparison sites like Pricegrabber.com, and social media reviews This environment, combined with low switching costs and heightened price sensitivity, results in strong buyer power within the retail market, even for largely undifferentiated products Nevertheless, concerns about security can lead consumers to remain loyal to established retailers.

The rise of ecommerce platforms such as eBay and Etsy has enabled consumers to evolve from mere buyers to active sellers, enhancing their market power This change in consumer behavior poses a considerable challenge to traditional U.S retailers, as it heightens competition in the retail sector.

The outlook of the retail industry

The retail industry in time will likely develop according to the following trends (BCG, 2024):

Amid ongoing economic uncertainty, consumers are increasingly prioritizing affordability over brand loyalty, leading to a rise in the private label segment As brand differentiation diminishes and consumer preferences evolve, retailers are set to leverage this trend by strategically promoting private label products, thereby enhancing revenue through retail media and advertising.

In 2023, while retail M&A deal volume saw a decline, the average deal size significantly increased, highlighting continued consolidation in the sector Market leaders are taking advantage of undervalued struggling retailers, a trend likely to continue and drive a resurgence in deal activity in 2024.

AI is transforming the retail sector by redefining essential business operations In 2024, while generative AI will increasingly enhance consumer-facing applications, the most impactful developments are expected in internal functions like supply chain management, where AI will streamline processes and boost operational efficiency.

Retailers are reassessing their focus on e-commerce home delivery due to economic pressures Although the pandemic initially fueled significant growth in this area, rising consumer resistance to delivery fees and shrinking profit margins have led to a slowdown in delivery growth.

As consumer priorities shift towards value, the focus on experiential retail is declining Retailers are reallocating investments from entertainment-driven initiatives to technology-focused solutions, enhancing the shopping experience with seamless processes like checkout-free stores and optimizing operations through AI-powered staff management.

The global retail industry is at a crucial juncture, facing economic challenges and shifting consumer behaviors that require retailers to balance immediate pressures with strategic investments in technology and business models The decisions made in 2024 are set to significantly influence the industry's future, presenting opportunities for transformative growth or risks of stagnation, contingent upon sector resilience and leadership vision Despite a volatile environment, there is widespread optimism within the retail sector for 2024, with 89% of retailers anticipating revenue growth between 1% and 9%, averaging around 4% Notably, European retailers are the most confident, expecting stronger revenue expansion, particularly within the 5% to 9% growth range (Deloitte, 2024b).

Figure 3.1: The expected growth of retailers’ revenue (% YoY)

The global retail industry is poised for increased operating profit margins, with 74% of retailers anticipating modest growth This optimism is largely fueled by a focus on e-commerce profitability (47%) and diversification into higher-margin revenue streams (34%) However, there are regional differences, as the U.S and Europe show greater confidence compared to the Middle East, Asia, and Australia (MEAA) (Deloitte, 2024b).

Figure 3.2: The expected growth of retailers’ operating margin (% YoY)

Company-level analysis and valuation

Walmart Inc

1 A summary of each financial statement is presented in the tables in Appendix A

An explanation of the general assumptions and detailed forecast items as well as the methods are presented in

WMT) Sector(s) Consumer Defensive Industry Discount Stores

Headquarters United States Fiscal year Jan 31, 2024

Walmart Inc., established in 1945, is a leading global retail corporation that operates diverse retail formats and a comprehensive e-commerce platform, providing an extensive selection of products including groceries, apparel, electronics, and financial services.

Operating Income (EBIT) Income Before Tax (EBT) Net Income Total Revenues (RHS)

Walmart Inc is a leading multi-channel retailer with a presence in physical stores, warehouse clubs, and eCommerce platforms across the Americas, Africa, and Asia The company offers a wide range of products, including groceries, health items, technology, and apparel, while maintaining a focus on everyday low prices through both its own and third-party brands In addition to retail, Walmart provides various services such as fuel, gift cards, financial services, and value-added offerings like Walmart Connect and Fulfillment Headquartered in Bentonville, Arkansas, Walmart's business model effectively combines its brick-and-mortar stores with strong online capabilities, operating through segments including Walmart U.S., Walmart International, and Sam’s Club.

4.1) With a physical footprint of 4,553 owned and 661 leased retail units in the U.S., and

Walmart operates 1,469 owned and 3,933 leased units globally, catering to a vast customer base of 255 million through its 10,500 stores and online platforms across 19 countries In addition to retail sales, the company also earns revenue from membership fees and various other sources (Marketline, 2024b).

Walmart's segmentation strategy includes a diverse range of retail formats in the U.S., providing groceries, health products, general merchandise, and financial services The company boasts over 30 private label brands, such as Athletic Works, Equate, and Great Value, while also marketing products under licensed brands like Better Homes & Gardens.

Walmart, a leading retail giant, operates in 19 countries through various formats such as supermarkets and hypermarkets In addition to retail and wholesale, Walmart provides financial services, advertising, and private label brands like Equate and Great Value, alongside well-known international brands Its robust online presence includes e-commerce platforms like walmart.com.mx and flipkart.com.

This membership-based warehouse retailer provides an integrated shopping experience through both physical stores and e-commerce, featuring services like curbside pickup, ship-from-club, mobile scanning, and delivery Their product offerings encompass five key categories: grocery, fuel, home, technology, and health, featuring both national and private label brands.

(Member's Mark) available online (samsclub.com) and through mobile apps

Performance Revenue for FY2024 totaled US$441,817 million, a 5.1% YoY increase and a 6%

CAGR from 2022-24, comprising 68.2% of total company revenue

Operating income reached US$22,154 million, up 7.4% YoY

In FY2023, the grocery segment led revenue generation with 58.8%, while general merchandise accounted for 28.2%, health and wellness contributed 11.1%, and other categories made up 1.9% The growth in revenue was primarily fueled by an increase in average ticket size, especially within the grocery and health and wellness sectors.

The segment generated US$114,641 million in revenue during FY2024, a 13.5% year-on-year increase and a 6.6%

CAGR over 2022-24, contributing 17.7% to total company revenue

Operating income surged 65.6% to US$4,909 million

In FY2023, Mexico and Central America dominated the market with 40.1% of total revenue, followed by Canada at 22.1%, China at 14.6%, and other regions accounting for 23.2% The growth in revenue was primarily fueled by the expansion of international sales and advantageous currency exchange rates.

In FY2024, the segment generated $86,179 million in revenue, reflecting a 2.2% year-on-year increase and an 8.2% CAGR from 2022 to 2024, accounting for 13.3% of total company revenue Operating income rose to $2,192 million, marking an 11.6% increase year-on-year Grocery and Consumables led revenue contributions at 62.9% in FY2023, followed by Fuel, Tobacco, and other categories at 17.4%, with fuel sales experiencing a 2.3% growth.

Key stats As of January 2024, the company operated a network of 4,615 retail units comprising supercenters,

As of January 2024, the segment operated a vast network encompassing 5,075 retail units, 327 wholesale stores, 176

As of January 2024, the segment operated a network comprising 599 retail units and 30

The company operates 24 neighborhood and discount stores, backed by 162 distribution facilities—comprising 22 owned and 154 leased—alongside 30 e-commerce fulfillment centers Additionally, it boasts a vast network of 4,300 same-day delivery centers, 2,800 pickup locations, and 2,900 delivery locations, ensuring efficient service and accessibility for customers.

Africa, Canada, Central America, Chile, China, India, and Mexico

Table 4.2: Walmart’s internal and external factors analysis

Multi-channel Sales Walmart employs a multi-channel sales strategy, combining physical and online stores With over

10,500 retail stores across 19 countries serving 255 million customers weekly, the company also operates 30 e-commerce fulfillment centers and ships merchandise through 162 distribution facilities

Walmart boasts a vast network of store formats, from small neighborhood shops to large supercenters and membership-only warehouse clubs, providing a wide variety of products through multiple sales channels, including its robust e-commerce platform.

Customer-centric Approach Walmart's price leadership strategy involves offering a

Walmart's significant reliance on the U.S market, which accounted for 82.1% of its FY2023 revenue, presents considerable risks This concentration makes the company susceptible to economic and geopolitical challenges in the region, potentially affecting demand, supply chain efficiency, market share, and growth opportunities Furthermore, such dependence restricts Walmart's capacity to expand and compete effectively on a global scale.

Product Recall Product recalls, such as the

March 2024 recall of 8.25-ounce Great Value Honey Roasted Cashews due to undeclared allergens, pose substantial risks to a company's brand image and financial performance These incidents can erode

25 wide range of products at competitive prices through EDLP, EDLC, and Omni- channel initiatives EDLP maintains consistently low prices, while EDLC reduces costs to offer further savings

Walmart+ enhances customer convenience through its pickup and delivery services, while Walmart Connect broadens its reach with advertising and fulfillment solutions, strengthening customer relationships and increasing market penetration However, issues with consumer trust can lead to reputational harm, reduced sales, and considerable expenses related to product retrieval and replacement.

In 2024, Walmart launched several strategic initiatives to expand its market reach and improve logistics, including AI-driven Route Optimization in March, which enhances delivery efficiency by reducing costs and increasing speed Additionally, the company introduced early morning deliveries to better serve customer needs.

Additionally, a beta social commerce platform, Shop with Friends, was unveiled in January, enabling communal shopping experiences and informed purchasing through virtual interactions

Partnerships and Collaborations The company has formed strategic partnerships to expand its market reach and revenue streams, including collaborations with

Roblox in April for gaming engagement,

Consumers Energy for clean energy, EDP

Renewables North America in March for a

15-year solar project, BelliWelli for product expansion, and Unity in January for metaverse shopping experiences

Walmart's operations are heavily influenced by supplier-related risks, as the company depends on low-cost, readily available products from qualified suppliers who meet strict standards Challenges in sourcing compliant suppliers both domestically and internationally are compounded by issues such as political instability, supplier financial health, labor problems, and supply chain disruptions, all of which can adversely impact product sales and overall revenue.

The Kroger Co

(NYSE: KR) Sector(s) Consumer Defensive Industry Grocery Stores

Headquarters United States Fiscal year Feb 03, 2024

The Kroger Co., founded in 1883, is a leading U.S food and drug retailer that operates multiple store formats, including combination food/drug stores, multi-department locations, marketplaces, and warehouses The company provides a wide range of products, including groceries, pharmacy services, general merchandise, and private-label items.

The Kroger Co is a leading U.S retailer based in Cincinnati, Ohio, offering a wide range of food and non-food products through its supermarkets, drug stores, and various retail formats With a network of 2,722 supermarkets across 35 states and the District of Columbia as of January 2024, Kroger provides an extensive selection that includes fresh produce, meat, seafood, groceries, and pharmacy services, often under private labels like Baker's and Harris Teeter The company's business model supports both in-store and online shopping, while its vertical integration features 33 food production facilities, producing a variety of items from dairy to meat Additionally, Kroger operates 2,257 pharmacies and 1,665 fuel centers, offering over 12,600 private label products, including grocery, general merchandise, health and beauty care, and natural foods.

Table 4.3: Summary of Kroger’s segmentation activities

Non-Perishable The segment offers a diverse product range encompassing general merchandise, grocery, natural food, and health and beauty care items

Revenue for FY2024 totaled US$76,903.0 million, representing a 3.8% year- on-year increase and a compound annual growth rate of 5.1% from 2022 to

2024 This segment contributed 51.3% to the company’s overall revenue in FY2024

Fresh The segment offers a diverse range of fresh food options, including seven primary categories: produce, seafood, floral, deli, meat, bakery, and prepared foods

Revenue from the segment totaled US$35,686.0 million in FY2024, constituting 23.8% of the company's overall revenue This figure represents a 0.7% year-on- year increase and a

39 compound annual growth rate of 2.5% during the 2022-24 period

Supermarket Fuel Revenue declined 10.8% year-over-year in FY2024 to

US$16,621.0 million, representing a compound annual growth rate of 6.4% over the 2022-24 period This segment contributed 11.1% to total company revenue during FY2024

Pharmacy The segment offers a comprehensive suite of e- commerce services, including order pickup, delivery, and pharmacy- related transactions

Revenue for FY2024 totaled US$14,259.0 million, representing a 6.6% year- on-year increase and a compound annual growth rate of 7.2% during 2022-

24, contributing 9.5% to the company's overall revenue

Other revenue streams include sales to external food production facilities, income from data analytics and third-party media services, earnings from consolidated entities, specialty pharmacy and in-store clinics, digital coupon platforms, and various online sales not classified elsewhere.

Revenue for FY2024 totaled US$6,570.0 million, marking a 1.9% year-over- year decline and a negative compound annual growth rate of 4.4% during 2022-

2024 This segment contributed 4.4% to the company's overall revenue in FY2024

Table 4.4: Kroger’s internal and external factors analysis

Brand Portfolio Leveraging a robust portfolio of over 80 brands including

Operational Performance The company experienced a significant decline in

Baker’s, Kroger, and Fred Meyer have established a strong market presence and customer loyalty, which enhances brand recognition This allows the company to effectively enter new markets while maintaining its existing customer base in a competitive environment, providing a wide variety of products that include groceries, apparel, home goods, and more.

Kroger boasts a varied retail network that includes supermarkets, convenience stores, jewelry shops, and specialty pharmacies As of January 2024, the company operates around 2,800 locations, comprising 2,722 supermarkets, with approximately 50% of these being company-owned.

2,257 pharmacies and 1,665 fuel centers integrated into its supermarket operations,

Kroger has a strong market presence and experiences high foot traffic, with each store offering over 12,600 private label products However, in FY2024, the company faced challenges as operating income fell by 25% to $3,096 million, and net income decreased by 3.5% to $2,164 million, reflecting a significant decline in financial health This downturn may undermine investor confidence and impede future expansion efforts.

Launch of New Seafood Items The company prioritizes growth through product innovation, as evidenced by the

March 2024 launch of new seafood options tailored for oven, microwave, and air fryer cooking This expansion includes 9 product categories under the Selection, Kroger

Brand, and Home Chef labels, accessible both in-store and through online platforms

Kroger operates in a highly competitive retail landscape, contending with various national and regional chains, supercenters, dollar stores, and restaurants that all strive for market share The company faces significant challenges from major competitors such as Amazon, Costco, and Walmart, which have superior resources, brand recognition, and financial power, potentially hindering Kroger's ability to innovate and adapt to market demands.

Food and Grocery Retail Market in U.S

The company is well-positioned within the expanding U.S food and grocery retail market, projected to reach $157.9 billion by

2027, with bakery and cereal products comprising a significant segment valued at

$137.6 billion in 2022 The company's diverse product range, including bakery items, aligns with market growth driven by economic conditions, consumer spending, and evolving preferences

The U.S online retail market is rapidly growing due to increasing internet penetration and user-friendly online interfaces This growth presents a significant opportunity for Kroger, which provides a wide range of products through its e-commerce platform, including groceries, apparel, and electronics.

Kroger's strong online presence enables the company to take advantage of the growing online shopping market and changing consumer preferences Recent developments, such as Target's launch of Express Self-Checkout in March 2024, underscore the competitive and rapidly evolving retail landscape.

Labor costs for U.S businesses, including Kroger with 414,000 employees across 2,800 locations, are on the rise due to state-specific minimum wage increases, reaching up to $17 in D.C and $16 in California, alongside a tightening labor market These escalating expenses, influenced by government mandates and the push for increased full-time employment, could significantly impact profit margins.

The company navigates a complex regulatory landscape that includes antitrust, environmental, privacy, data protection, healthcare, and financial laws With a growing emphasis on ESG factors, it faces additional challenges that necessitate compliance with numerous regulations affecting different operational areas To ensure business sustainability, it is essential to anticipate and adapt to changing regulatory conditions, including potential cost increases.

The company's competitive strategy is a blend of both differentiation and cost-leadership

Kroger emphasizes customer value and convenience through four key strategic pillars: Fresh, Our Brands, Data & Personalization, and Seamless To improve the shopping experience, the company aims to implement fuel centers at every supermarket, each featuring five essential services.

10 fuel dispenser islands and 40,000-50,000 gallon storage tanks Additionally, Kroger seeks to optimize in-store operations, integrate digital shopping, and pursue growth through

42 mergers, acquisitions, and strategic alliances A recent example of this strategy is the January

2024 partnership with MidOcean Partners to support emerging CPG brands and explore investment opportunities (Marketline, 2024c)

Kroger's revenue has shown an upward yet unstable trend, with poor cost management contributing to declining profits In FY2023, revenue increased by 7.52%, but this growth slowed to just 1.20% in FY2024 A similar pattern was observed in FY2021 and FY2022, where revenue growth peaked at 8.35% before dropping to 4.07% During periods of low revenue growth, expenses such as cost of sales and operating costs have risen more sharply, leading to a decline in profits Specifically, Kroger's EBIT and after-tax profit fell by 24.96% and 3.57% in FY2024, respectively Nonetheless, a reduction in financial expenses has somewhat alleviated the pressure on the company's profit decline.

Source: Author’s calculation based on The Kroger Co (2020-2024) b Balance sheet

Kroger's total assets have experienced a slight increase, with current assets growing at a faster rate than long-term assets However, the growth rate slowed significantly in FY2022, with total assets rising by only 0.87% and current assets decreasing by 2.63% In the following two fiscal years, both current and long-term assets saw growth, yet total asset growth remained modest, at 1.09% in FY2023 and 1.78% in FY2024 This prolonged slow growth has impacted the company's overall asset structure.

Operating Income (EBIT) Income Before Tax (EBT)

Net Income Total Revenues (RHS)

43 remained almost unchanged, with the value of long-term assets being about 3 times that of short-term assets

Figure 4.14: Kroger’s Current assets structure

Source: Author’s calculation based on The Kroger Co (2020-2024)

Kroger's asset structure remained stable in the latest fiscal year, with a notable 85.52% increase in cash and cash equivalents, while accounts receivable, inventories, and other current assets saw declines of -4.39%, -6.02%, and -1.99%, respectively Despite the significant growth in cash, its overall proportion within total assets remains minimal, highlighting the importance of inventory management Consequently, these changes have not substantially impacted Kroger's current asset structure.

Figure 4.15: Kroger’s Non-current assets structure

Source: Author’s calculation based on The Kroger Co (2020-2024)

Cash & cash equivalents Net receivables Inventories Other current assets

Net PP&E Intangible assets Other non-current assets

Target Corporation

(NYSE: TGT) Sector(s) Consumer Defensive Industry Discount Stores

Description: Founded in 1902, Target Corporation is a U.S general merchandise retailer offering apparel, home goods, groceries, electronics, and seasonal items through stores and online channels

Target Corporation is a leading U.S retailer that offers a diverse range of general merchandise and food products, including apparel, electronics, home goods, and groceries Operating under the Target and Bullseye Design brands, the company features its own labels such as A New Day, Future Collective, and Good & Gather In addition to retail, Target provides various services like clinics, home delivery, and photo printing The company generates revenue from six key product categories: Apparel and Accessories, Beauty and Household, Food and Beverage, Hardlines, Home Furnishings and Decor, and Credit Card Profit Sharing and Other.

As of 2024, Target operates 1,956 stores in the U.S., covering 245.9 million square feet of retail space This includes 1,532 owned stores, 264 leased stores, and 160 owned buildings on leased land Additionally, Target's infrastructure comprises 58 supply chain facilities and a corporate presence across six offices and two campuses nationwide.

Table 4.5: Summary of Kroger’s segmentation activities

Our diverse product range includes apparel for all ages, catering to newborns, toddlers, boys, girls, men, and women We also offer a variety of complementary items, such as jewelry, accessories, and footwear, ensuring a complete wardrobe for every individual.

Revenue for FY2024 totaled US$16,485.0 million, marking a 6.6% year-over-year decline The compound annual growth rate from 2022 to 2024 was negative 4.1% This segment contributed 15.4% to total company revenue in FY2024

The product category encompasses six primary segments: beauty, personal care, baby care, cleaning, paper products, and pet supplies

Revenue for FY2024 totaled US$31,284.0 million, representing a 5.8% year-over- year increase and a compound annual growth rate of 7.1% during 2022-2024 This segment contributed 29.2% to the company's overall revenue in FY2024

The Food and Beverage segment provides a diverse selection of products, featuring essential items like dry goods and dairy, ready-to-eat options such as deli and bakery items, as well as fresh produce, meat, and frozen foods Additionally, it includes a variety of snacks, beverages, and candy.

US$23.899 billion, demonstrating a year-over-year growth of 4.3% This represents a compound annual growth rate of 8.5% during the 2022-2024 period Notably, this segment contributed 22.3% to the company's total revenue in FY2024

Hardlines This segment encompasses a diverse range of consumer goods, including electronic devices like video game systems and software, recreational equipment, children's playthings, entertainment items, and travel accessories

In FY2024, the company's revenue fell by 8.9% year-over-year to US$16,162 million, reflecting a negative compound annual growth rate of 6.8% from FY2022 to FY2024 This segment accounted for 15% of the total company revenue during FY2024.

The product range encompasses a diverse array of household items, including furnishings, lighting, kitchen utensils, small appliances, home decor, stationery, personal care products, home maintenance supplies, and seasonal goods

Revenue for FY2024 declined 8.7% year-over-year to US$17.76 billion, reflecting a negative compound annual growth rate of 6.4% between

2022 and 2024 This segment contributed 16.5% to the company's overall revenue during the fiscal year

Includes advertising, Shipt membership and service revenues, commissions earned on third-party sales through Target.com, rental income, credit card program agreement

Revenue for FY2024 reached US$1,609.0 million, representing a 5.0% year-over- year increase and a compound annual growth rate of 7.4% from 2022 to 2024 This

54 with TD and other miscellaneous revenue segment contributed a modest 1.6% to the company's overall revenue in FY2024

Table 4.6: Target’s internal and external factors analysis

Target utilizes a robust in-house logistics network to effectively supply its retail stores across the U.S By owning and leasing numerous distribution centers, the company guarantees timely inventory replenishment, which minimizes stockouts and reduces lead times This vertically integrated strategy decreases dependence on external logistics providers, resulting in lower operating costs and enhanced profit margins.

Multi-Channel Sales Target utilizes a multi-channel approach to reach customers, operating nearly 2,000 physical stores across various sizes and formats in the U.S

This network is complemented by their online platform, Target.com, further strengthening their direct-to-consumer presence

The company's heavy dependence on the U.S market restricts its revenue potential and limits its ability to scale and broaden its customer base, especially when compared to diversified competitors like Walmart This geographic concentration makes the company susceptible to various economic, social, and environmental risks within a single region, which ultimately stifles its growth and competitiveness In contrast to Walmart's vast global presence, the company's limited footprint increases its vulnerability to regional instability and natural disasters, hindering its overall development prospects.

Corporate Restructuring Target, a U.S.- based retailer of general merchandise and food, invested $4.8 billion in FY2024 to restructure operations, including store renovations, new openings, and IT

Third Parties and Supply Chain Risks

Target's operations are heavily reliant on third-party providers for a diverse range of critical functions, including technology, logistics, finance, and customer service

In FY2023, Target implemented a strategy that included remodeling 65 stores and establishing partnerships with Ulta Beauty, with plans to add 140 new stores by the end of 2024 This initiative focuses on reducing operational costs and optimizing resource allocation Additionally, Target aims to expand its presence by opening 20 new stores and pursuing more collaborations with Ulta Beauty in the current fiscal year.

In early 2024, the company implemented a dual-pronged expansion strategy that prioritized product innovation and market reach This approach included the launch of advanced retail technologies, such as Express Self-Return systems, enhancing customer experience and operational efficiency.

The company has formed strategic partnerships with renowned designers to develop exclusive product lines while simultaneously introducing a new budget-friendly brand This initiative aims to reach a wider consumer audience by emphasizing value, quality, and a diverse selection of everyday essentials.

The U.S online retail market is experiencing substantial growth, fueled by consumer convenience, interactive features, and increasing internet adoption Forecasts indicate that this market could reach $964.6 billion by 2025, with electronics emerging as the leading sector A recent partnership with Tot further highlights the opportunities within this expanding landscape.

Squad on Target.com demonstrates its strategic approach to capitalizing on this

Disruptions in key relationships can significantly jeopardize a company's operations, resulting in potential financial losses, damage to reputation, and operational hurdles if third parties do not fulfill performance expectations or contractual commitments.

Target faces intense competition in a diverse retail landscape that includes off-price stores, apparel retailers, and major online players This competitive environment is influenced by factors such as service quality, pricing strategies, and distribution capabilities Target's rivals consist of well-established national chains and emerging market entrants, many of whom possess stronger brand recognition, greater resources, and a capacity for driving innovation.

Labor costs in the U.S are rising due to factors such as mandated minimum wage increases, a tight labor market, and a growing full-time workforce, which collectively put upward pressure on operating costs and may affect profit margins Additionally, state-level minimum wage variations, ranging from $7.25 to $17 per hour, complicate the labor cost landscape for businesses.

56 growth by offering specialized services within the online retail space

Target's competitive strategy emphasizes differentiation, aiming to boost market share and consumer engagement through an enhanced product assortment and shopping experience The company is dedicated to growing its owned brands, curating a robust selection of national brands, and forming strategic partnerships to deliver innovative and stylish products that offer value To improve accessibility and convenience, Target plans to expand its store footprint, modernize existing locations, and enhance its digital platform Additionally, the company seeks to optimize its supply chain for greater efficiency and speed while utilizing its store network to lower fulfillment costs Recent initiatives, including the implementation of new security technology, underscore Target's commitment to ensuring a safe and seamless shopping environment.

Source: Author’s calculation based on Target Corp (2020-2024)

Dollar General Corporation

DG) Sector(s) Consumer Defensive Industry Discount Stores

Founded in 1939, Dollar General Corporation is a leading discount retailer in the southern United States, providing a wide range of consumables, packaged foods, seasonal products, health and beauty items, apparel, and home goods at affordable prices.

Dollar General Corporation, headquartered in Goodlettsville, Tennessee, is a leading discount retailer with over 20,000 stores across the U.S and Mexico as of March 2024 The company offers a wide range of household essentials, including food, cleaning supplies, and personal care items, under brand names like Dollar General and Clover Valley, and maintains an e-commerce platform at dollargeneral.com With a strong presence in the southern, midwestern, and eastern U.S., Dollar General's product categories include Consumables, Seasonal Products, Home Products, and Apparel The company's extensive retail operations are supported by a robust distribution network featuring 19 distribution centers equipped with advanced warehouse and cold storage facilities to efficiently manage inventory.

Table 4.7: Summary of Dollar General’s segmentation activities

The consumables segment features a wide array of products, including essential household items like paper and cleaning supplies, a selection of food products ranging from packaged goods to fresh produce and snacks, personal care products such as over-the-counter medications and toiletries, pet supplies, and tobacco items.

The segment reported a revenue of

$31.34 billion in FY2024, constituting 81% of total revenue This figure represents a year-over- year growth of 3.9% and a compound annual growth rate of 9.3% between FY2022 and FY2024

The segment offers a diverse product range encompassing seasonal merchandise, toys, electronics, stationery, telecommunications, gardening, home improvement, automotive supplies, and office equipment

Revenue for FY2024 declined 2.4% year-over-year to US$4,083.8 million, representing a compound annual growth rate of negative 1.2% from FY2022 This segment contributed 10.6% to total company revenue in FY2024

The product segment encompasses a diverse range of

Revenue for FY2024 declined 7.2% year-over-year to

68 household items, including culinary equipment, lighting solutions, home organization products, decorative accents, and textiles for both kitchen and bathroom environments

US$2,163.8 million, reflecting a negative compound annual growth rate of 3.5% from 2022 to 2024 This segment contributed 5.6% to the company's overall revenue in FY2024

The apparel segment provides a wide variety of casual clothing, footwear, and accessories suitable for all age groups, from infants and toddlers to children and adults It also includes essential items like socks, underwear, and disposable diapers.

Revenue for FY2024 declined 6.2% year-over-year to US$1,101.4 million, representing a compound annual growth rate of - 13.1% from FY2022 This segment contributed 2.8% to total company revenue in FY2024

Table 4.8: Dollar General’s internal and external factors analysis

Dollar General boasts a significant retail presence throughout the U.S., especially in rural and suburban regions Its unique small-store format, strategically positioned for customer convenience, sets it apart from competitors This close proximity encourages customer loyalty and frequent shopping visits, establishing Dollar General as a favored destination in many communities Most stores operate on long-term leases, ensuring stability in their locations.

Distribution Channel Dollar General maintains an extensive distribution network

Dollar General's FY2024 financial results reveal a notable decrease in operating income, net income, and operating margin from the previous year This decline, driven by foreign exchange fluctuations and restructuring costs, poses a significant challenge to the company's growth and expansion strategies.

The company operates a network of owned and leased facilities that enhance efficient inventory management Merchandise is primarily distributed to stores through third-party trucking, complemented by the company's own transportation assets This strong logistical infrastructure ensures timely replenishment, minimizes stockouts, and reduces lead times, thereby bolstering the company's retail operations.

Dollar General's expansion strategy focuses on opening new stores, with recent locations established in North Carolina, Georgia, and Ohio These stores provide a wide range of products, including essential household items, personal care products, and a growing selection of fresh food options.

By expanding its geographic footprint and product range, Dollar General aims to strengthen its market position

Apparel Retail Market in U.S Dollar

General offers a range of casual apparel and accessories for various demographics The

U.S apparel retail market, driven by factors such as increasing consumer spending and e-commerce, is projected to expand significantly Womenswear dominates the industry, followed by menswear and childrenswear, with clothing specialists representing the primary distribution channel

Rising minimum wages at both federal and state levels in the U.S are significantly driving up labor costs for businesses This trend, intensified by tight labor markets and an expanding full-time workforce, is affecting companies' operating expenses and overall profitability.

Dollar General's heavy reliance on a limited number of suppliers, especially its top two, creates considerable supply chain vulnerabilities Disruptions like supplier defaults or compliance issues could result in product shortages, financial setbacks, and harm to the company's reputation.

Intense Competition The company operates in a highly competitive retail landscape characterized by intense rivalry driven by factors such as product quality, pricing, and innovation Differentiating its

The U.S online retail market is experiencing significant growth, fueled by consumer demand for convenience and increased internet accessibility Companies like Dollar General, which operate both physical discount stores and online platforms such as dollargeneral.com, are strategically positioned to take advantage of this expanding e-commerce landscape.

U.S market value exceeding $900 billion by 2027 offerings through a strong value proposition is critical for survival The company faces competition from a diverse range of retailers, including discount stores and major chains, some of which possess greater financial resources and undertake aggressive expansion strategies, as exemplified by recent market entries and collaborations

Dollar General's competitive strategy prioritizes cost leadership and includes a comprehensive expansion plan featuring new store openings, such as the pOpshelf concept, in both established and new markets, along with store relocations and remodels to meet changing customer needs The company is also looking to expand into Mexico In FY2024, Dollar General executed 2,385 real estate projects, which included over 800 new store openings, 1,500 remodels, and 85 relocations By concentrating on everyday essentials to encourage repeat visits and investing in strategic initiatives, Dollar General aims for sustained sales growth and profitability both domestically and internationally.

Dollar General (DG) has experienced inconsistent revenue growth over the past five years, significantly affecting its profitability due to poor cost management In FY2024, DG's revenue rose by just 2.24%, while the cost of sales increased by 3.26%, leading to a minimal gross profit increase of only 0.18% Furthermore, operating expenses surged by 9.82%, and interest expenses skyrocketed by 54.67%, resulting in a substantial decline in EBIT and net profit by 26.50% and 31.24%, respectively This troubling trend was also evident in FY2022.

Figure 4.37: Dollar General’s Comprehensive Income

Source: Author’s calculation based on Dollar General Corp (2020-2024) b Balance sheet

Conclusion and Recommendation

A top-down analysis of four major US retail companies—Walmart Inc., The Kroger Co., Target Corporation, and Dollar General Corporation—was conducted to provide investment recommendations The findings indicate that the external environmental factors predominantly present negative implications for the retail industry and businesses overall Notably, only certain aspects of technology demonstrate a potential dual impact on revenue, costs, and profits for these companies.

The retail industry presents significant growth opportunities despite facing challenges from technological advancements and adverse external environmental factors However, the competitive landscape remains intense, with existing players and new entrants vying for market share.

(iii) For the internal analysis of each company:

Walmart's strong financial position and substantial asset size enable it to effectively compete through low costs and a diverse range of products and services Consequently, the valuation analysis supports a recommendation to BUY the company's shares.

Kroger may not match Walmart's asset size, yet it remains a formidable competitor due to its low costs and diverse product offerings Despite facing mixed financial factors, Kroger's revenue continues to rise, exhibiting unusual fluctuations Given its potential for growth, the valuation suggests that purchasing Kroger's shares is a sound investment opportunity.

Target's assets are nearly equivalent to those of Kroger, yet it differentiates itself through unique products and services, despite facing both positive and negative financial factors The company's revenue experiences significant fluctuations and a decline, leading to downsizing and operational challenges Consequently, the valuation suggests that selling Target's shares is a prudent decision.

Dollar General operates on a modest scale with a focus on low-cost competition; however, its future operating results lack positive indicators Consequently, the valuation suggests that selling the company's shares is the most suitable course of action.

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Dollar General Corp has consistently published its annual reports, detailing its financial performance and strategic initiatives from 2018 through 2023 These reports, issued annually from Goodlettsville, provide insights into the company's growth and operational resilience Additionally, the IMF's 2024 World Economic Outlook highlights a steady yet slow global economic environment, emphasizing resilience amid divergence.

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AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR THE UNITED STATES,

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Appendix A: Financial Statement Summary A1 Walmart

Cost of Sales -374,601,000 -383,605,000 -409,115,000 -418,300,000 -452,776,000 -478,289,000 Gross Profit 139,804,000 140,359,000 150,036,000 154,454,000 158,513,000 169,836,000 Operating Expenses -117,847,000 -119,791,000 -123,088,000 -126,012,000 -133,985,000 -138,724,000 Unusual & exceptional expenses -4,800,000 0 -12,800,000 -5,710,000 -4,100,000 -4,100,000

Income Tax Expense -3,839,000 -4,915,000 -6,858,000 -4,756,000 -5,724,000 -5,578,000 Income After Tax (EAT) 7,621,000 15,201,000 13,706,000 13,940,000 11,292,000 16,270,000

Net PP&E 111,395,000 127,049,000 109,848,000 112,624,000 119,234,000 130,338,000 Intangible assets 31,181,000 31,073,000 28,983,000 29,014,000 28,174,000 28,113,000 Other non-current assets 14,822,000 16,567,000 23,598,000 22,152,000 20,134,000 17,071,000

Loans & short-term debt 2,605,000 5,873,000 3,606,000 3,314,000 4,758,000 4,172,000 Trade creditors 47,060,000 46,973,000 49,141,000 55,261,000 53,742,000 56,812,000 Other current liabilities 27,812,000 24,944,000 39,898,000 28,804,000 33,698,000 31,431,000

Total Non-Current Liabilities 62,184,000 77,153,000 72,320,000 65,590,000 67,245,000 69,635,000 Total Liabilities 139,661,000 154,943,000 164,965,000 152,969,000 159,443,000 162,050,000

Retained earnings 80,785,000 83,943,000 88,763,000 86,904,000 83,135,000 89,814,000 Accumulated other comprehensive loss -11,542,000 -12,805,000 -11,766,000 -8,766,000 -11,680,000 -11,302,000

Total cash from operating activities 27,753,000 25,255,000 36,074,000 26,029,000 28,841,000 35,726,000

Consolidated Net Income 7,179,000 15,201,000 13,706,000 13,940,000 11,292,000 16,270,000 Depreciation & Amortization 10,678,000 10,987,000 11,152,000 10,658,000 10,945,000 11,853,000

Other non-cash items 1,734,000 945,000 1,521,000 1,652,000 1,919,000 2,642,000 Change in net receivables -368,000 154,000 -1,086,000 -1,796,000 240,000 -797,000 Change in inventories -1,311,000 -300,000 -2,395,000 -11,764,000 -528,000 2,017,000 Change in account payable 1,831,000 -274,000 6,966,000 5,520,000 -1,425,000 2,515,000 Change in accrued liabilities 183,000 186,000 4,623,000 1,404,000 4,393,000 -1,324,000 Change in accrued income taxes -40,000 -93,000 -136,000 39,000 -127,000 -468,000

Change in other operating cash flow 0 0 0 1,848,000 0 0

Total cash from investment activities -24,036,000 -9,128,000 -10,071,000 -6,015,000 -17,722,000 -21,287,000

Acquisition of business, net cash -14,656,000 -56,000 -180,000 -359,000 -740,000 -9,000 Other investing activities -431,000 479,000 102,000 -879,000 -295,000 -1,057,000

Total cash from financing activities -2,537,000 -14,299,000 -16,117,000 -22,828,000 -17,039,000 -13,414,000

Net change in short-term borrowings -53,000 -4,656,000 -324,000 193,000 -34,000 512,000

Long-term debt repayment -3,784,000 -1,907,000 -5,382,000 -13,010,000 -2,689,000 -4,217,000 Dividends paid -6,102,000 -6,048,000 -6,116,000 -6,152,000 -6,114,000 -6,140,000 Purchase of company stock -7,410,000 -5,717,000 -2,625,000 -9,787,000 -9,920,000 -2,779,000 Other financing activities -1,060,000 -1,463,000 -1,670,000 -1,017,000 -3,323,000 -5,757,000

Cost of Sales -94,838,000 -94,320,000 -100,709,000 -106,555,000 -115,450,000 -115,586,000 Gross Profit 26,324,000 27,966,000 31,789,000 31,333,000 32,808,000 34,453,000 Operating Expenses -23,710,000 -25,715,000 -29,009,000 -27,856,000 -28,682,000 -31,357,000 Unusual & exceptional expenses 1,782,000 176,000

Treasury shares -16,612,000 -16,991,000 -18,191,000 -19,722,000 -20,650,000 -20,682,000 Retained earnings 19,681,000 20,978,000 23,018,000 24,066,000 25,601,000 26,946,000 Accumulated other comprehensive loss -346,000 -640,000 -630,000 -467,000 -632,000 -489,000

Consolidated Net Income 3,078,000 1,512,000 2,588,000 1,666,000 2,249,000 2,169,000 Depreciation & Amortization 2,465,000 2,649,000 2,747,000 2,824,000 2,965,000 3,125,000

Change in accrued liabilities 416,000 -337,000 830,000 -287,000 -748,000 -917,000 Change in accrued income taxes

Change in other operating cash flow 234,000 70,000 464,000 -399,000 -856,000 824,000

Total cash from investment activities -1,186,000 -2,611,000 -2,814,000 -2,611,000 -3,015,000 -3,750,000

Acquisition of business, net cash -197,000

Total cash from financing activities -2,896,000 -2,083,000 -2,713,000 -3,445,000 -2,289,000 -2,170,000

Net change in short-term borrowings -1,321,000 350,000 -1,150,000

Total cash from operating activities 5,973 7,117 10,525 8,625 4,018 8,621

Change in accrued income taxes

Change in other operating cash flow -303 24 -137 -78 22 -85

Total cash from investment activities -3,416 -2,944 -2,591 -3,154 -5,504 -4,760

Acquisition of business, net cash

Total cash from financing activities -3,644 -3,152 -2,000 -8,071 -2,196 -2,285

Net change in short-term borrowings

Cost of Sales -17,367,039 -18,760,108 -22,453,740 -22,766,127 -25,299,888 -26,123,792 Gross Profit 8,258,004 8,993,865 11,293,099 11,454,322 12,544,975 12,567,817 Operating Expenses -6,141,698 -6,660,561 -7,738,334 -8,233,647 -9,216,673 -10,121,517 Unusual & exceptional expenses -31,000

Change in accrued income taxes 56,390 -20,404 -6,522 -14,642 -37,517 25,303

Change in other operating cash flow -12,249 -21,412 -20,127 -54,965 -71,852 -55,977

Total cash from investment activities -731,603 -782,485 -1,024,910 -1,065,557 -1,555,346 -1,694,023

Sale of business Acquisition of business, net cash Other investing activities

Total cash from financing activities -1,443,901 -1,450,680 -1,714,992 -2,832,002 -392,462 -542,068

Net change in short-term borrowings -63,300 58,300 -425,200 54,300 1,447,600 -1,501,900

Stock issuance Purchase of company stock -1,007,494 -1,200,376 -2,466,434 -2,549,669 -2,748,014

General assumptions: Although highly representative, it can be seen that the financial statements of the selected companies are very complex

Forecasting every indicator in financial statements may not be essential due to the limited information available, which impacts the accuracy of forecast results Consequently, this study will focus on predicting key financial indicators for the next five years (FY2025-2029) that are vital for the valuation methods discussed in the report.

The Year-over-Year (YoY) growth rate reflects the change in financial indicators, including the Net Debt, which accounts for both short and long-term debt issuance, adjusted for repayments, as reported in the cash flow statement.

Mean growth, or mean proportion, is determined by averaging data from the last five fiscal years (FY2020-2024) When calculating mean debt, this figure encompasses both short-term and long-term debt.

Adjusted mean growth will recalibrate mean growth figures to the nearest number, with specific exceptions: sales will see an adjustment to a mean growth rate of approximately 4%, reflecting the typical year-over-year projection by Deloitte for 2024, while net debt, which experiences significant fluctuations in growth rates, will have its growth number fixed to a stable level.

 Tax rate is set at 28%, as this is one of the upcoming U.S tax plans according to PwC (2024)

 Risk-free rate is set at 4%, as the Fed is expected to cut interest rates in the near future (IMF, 2024a-d) which could cool down the 10-year

 Beta is selected based on Finbox's 5-year data and Infrontanalytics' 1-3-year data at the time of the study

The anticipated market return is projected at 13%, reflecting the growth rate of the NYSE composite index, which includes stocks from selected companies, as indicated by YahooFinance data during the study period.

 Intrinsic value (on Tearsheet) is an equal-weighted-average result of Price-Multiples, Free Cash Flow To Equity & Free Cash Flow To

The Firm Therefore, the result of each method will be different from the final result

Adjusted mean proportion of sales 2.50%

Mean proportion of total assets 35.38%

Adjusted mean proportion of total assets 35.50%

Interest expense Mean proportion of sales 0.40%

7 Walmart is higher than mean growth and industry projection, as a result of a positive financial health in FY2024 and on-going stable recovery

Adjusted mean cost of debt 5.00%

After-tax cost of debt 3.60%

Weighted-average cost of capital 8.46%

8 Beta of Walmart is 0.52 by Finbox and 0.32-0.72 by Infrontanalytics

Forward looking by using latest data, strikethrough are outliers

Walmart Estimated for fiscal year 2025 Mean market ratio Suggested value of equity

Share outstanding 8,374 Average 5 fiscal years, diluted

Market Price (Fiscal year-end) 54.71 BUY

Free Cash Flow to Equity

Free Cash Flow to the Firm

Net debt (cash flow) 2,254 Subtract

Mean intrinsic value 58.89 Average FCFE and FCFF

Market Price (Fiscal year-end) 54.71 HOLD

9 Kroger is lower than mean growth and industry projection, as a result of mixed signs in financial health of the company

10 Beta of Kroger is 0.42 by Finbox and 0.19-0.59 by Infrontanalytics

Kroger Estimated for fiscal year 2025 Mean market ratio Suggested value of equity

Share outstanding 758 Average 5 fiscal years, diluted

Net debt (cash flow) -1,994 Subtract

11 Target is lower than mean growth and industry projection, as a result of mixed signals in financial health of the company

12 Beta of Target is 1.2 by Finbox and 1.32-1.37 by Infrontanalytics

Target Estimated for fiscal year 2025 Mean market ratio Suggested value of equity

Net debt (cash flow) -197 Subtract

Market Price (Fiscal year-end) 143.43 SELL

13 Dollar General is much lower than mean growth and industry projections, as negative signals are more than positive ones on the company’s financial health

14 Beta of Dollar General is 0.45 by Finbox and 0.35-0.75 by Infrontanalytics

Walmart Estimated for fiscal year 2025 Mean market ratio Suggested value of equity

Share outstanding 238 Average 5 years (end), diluted

Tiêu đề	Investment Report: An Analysis Of Walmart, Kroger, Target & Dollar General
Tác giả	Nguyen Huy Thinh
Người hướng dẫn	Assoc. Prof. Dr. Nguyen Duc Cuong
Trường học	MSc in Finance & Investment
Chuyên ngành	Finance
Thể loại	dissertation
Năm xuất bản	2024

Định dạng
Số trang	115
Dung lượng	3,77 MB