Archives for May 27, 2018

Over the last few years, Walmart (NYSE: WMT) has been steadily remaking its image. The company has lifted wages and improved training, mitigating a long-standing reputation as an abusive employer. It’s also embraced renewable energy and LGBT rights, surprisingly aligning itself with progressive values.

As a business, Walmart has also made other moves to expand beyond its traditional rural, Southern base. It acquired Jet.com in 2016, in part to get access to a brand popular with young urban millennials and also to gain the services of Jet.com founder Marc Lore, who had earlier started Diapers.com-parent Quidsi, which Walmart lost in a bidding war to Amazon.com (NASDAQ: AMZN). The retail giant followed up the Jet.com acquisition by taking over several other online retailers, including Modcloth and Bonobos, with an eye toward selling those brands on the Jet.com platform.

The high-end customer has long been an opportunity for Walmart as the company’s discount stores have historically focused on low- to middle-income consumers and, with a reputation for value rather than quality, it has struggled to court wealthier customers. However, its ownership of Jet.com gives it an opportunity to correct that, and Walmart is now launching a new service, called Jetblack, targeting affluent New York City shoppers.

What is Jetblack?

Helmed by Rent the Runway co-founder Jenny Fleiss, whom Walmart hired last year to run the new platform, Jetblack describes itself in job listings as a “members-only personal shopping and concierge service that combines the convenience of e-commerce with the customized attention of a personal assistant,” according to Recode. The service, which is currently being beta-tested, offers free delivery for household items in 24 hours and other items in two days. With its personalization and concierge services, the program seems to borrow from brands like Rent the Runway and Bonobos, which offer styling services. That category has emerged as a clear growth area in apparel retail, as the successful IPO of Stitch Fix and the launch of Nordstrom Local indicate. Such services are popular because they can help customers save time and find a better fit.

A big opportunity

For Walmart, the initiative is its latest attempt to grab a hold of a market that’s long eluded it. The retailer has essentially been locked out of the NYC market due in part to political resistance, and it still has no stores in the nation’s largest city. Walmart has made a play for New Yorkers through Jet, but gaining business from high-end customers is an even bigger opportunity.

As of 2016, the average Walmart shopper had an annual household income of $56,482, according to Kantar Retail, which was $13,000 less than that of Target’s average customer. It was also less than the incomes of shoppers on Amazon at $62,900, Amazon Prime at $69,300, and Costco at $77,400. All other things being equal, wealthier shoppers are more desirable since they have more money to spend, so it makes sense for Walmart to target the demographic.

While Walmart itself may be too closely associated with cheap merchandise for that brand to tap a higher-end demographic, Walmart’s supply chain, scale, and infrastructure should give initiatives like Jetblack an advantage, especially as the company has tapped some of retail’s brightest minds like Fleiss, Lore, and Bonobos founder Andy Dunn, who now oversees Walmart’s digital brands.

Brick-and-mortar retailers like Walmart are realizing that in order to remain successful, they need to expand beyond their traditional confines. Macy’s (NYSE: M), for example, pulled a similar move when it acquired the New York concept store, Story, and brought founder Rachel Shechtman on board as its new brand experience officer, who is expected to revamp the company’s approach to brick-and-mortar retail.

As Walmart remakes its international portfolio with the sale of its U.K. subsidiary, Asda, and the recent acquisition of a majority stake in Flipkart, the Indian e-commerce leader, it’s also making big moves at home, both with the core Walmart brand as it expands programs like grocery pickup and delivery, and its digital brands like Jet.com and Jetblack, which evolved out Store No. 8 project, an innovation incubator that has also acquired a virtual-reality start-up and is working on an Amazon Go competitor under the name Project Kepler.

It’s too soon to say whether Jetblack will be a success, but it’s clear Walmart is moving in the right direction with such initiatives. The company may be the world’s biggest by revenue, with more than $500 billion in sales, but as the high-end customer demographic shows, there are still plenty of growth opportunities on the horizon.

With T-Mobile’s (NASDAQ: TMUS) shares down 15% over the past 12 months, the market is presenting investors with an entry point. That’s because there are a number of catalysts that could help the wireless carrier rebound to new highs in the coming year. Specifically, here are three reasons why you may want to consider buying T-Mobile stock today.

1. Industry-leading customer growth

The first quarter of 2018 marked the 20th consecutive quarter T-Mobile added more than 1 million net customers, and its 17th straight quarter of industry-leading growth.

The company continues to disrupt the massive U.S. wireless industry, with unconventional moves like offering only unlimited plans, and eliminating contracts and overage charges. Innovative promotions — such as including free Netflix subscriptions with its family plans — further fueled its growth.

These “Un-Carrier” tactics helped T-Mobile surpass Sprint (NYSE: S) to become the third-largest U.S. wireless carrier. Now, the hard-charging company has set its sights on closing the gap between itself and industry titans Verizon and AT&T.

To do so, T-Mobile is aggressively investing in its wireless network. It purchased $8 billion of low-band spectrum to strengthen and expand its LTE network so as to be able to “compete in every corner of the country.”

These investments are boosting coverage and download speeds, as noted by CEO John Legere during the company’s fourth-quarter earnings call:

OpenSignal, the global standard for measuring consumers’ real-world mobile network experience, named T-Mobile as the winner in 5, count them, 5 categories in their recent report. Nearly 6 billion tests from actual customers of every major wireless network shows that T-Mobile’s network is the fastest in the industry, and that T-Mobile customers get an LTE signal more often than AT&T, Sprint, and even Verizon.

Between its Un-Carrier strategy and its arguably best-in-class network, T-Mobile is giving consumers a strong incentive to switch — and they’re doing so. The carrier expects to add 2.6 million to 3.3 million net new customers in the year ahead.

2. Surging cash flow

These robust subscriber gains are helping to drive T-Mobile’s revenue and profits sharply higher. Revenue rose 8.8% year over year to $10.5 billion in Q1, while adjusted EBITDA increased 10.8% to $3 billion.

Better still, that rapidly expanding customer base is fueling bountiful cash flow production. The company expects to generate annual free cash flow of $4.5 billion to $4.6 billion by 2019, which would represent a 3-year compound annual growth rate of 46% to 48% from 2016 to 2019.

This allows T-Mobile to invest in growth while also returning cash to investors via share repurchases, which should amplify EPS gains and drive its stock price higher.

3. A pending merger with Sprint

As can be seen, T-Mobile is doing just fine on its own. Yet management is looking to accelerate its surge toward being comparable in size with the U.S. wireless industry leaders by merging with Sprint.

Sprint and T-Mobile have tried to unite on two prior occasions, but concerns that regulators were poised to block those deals scuttled them. However, under President Trump, who is widely viewed as being less concerned about antitrust and anticompetitiveness issues, a deal may actually get done this time.

The proposed merger deal values the combined company at about $146 billion, compared to the approximately $200 billion values currently placed on each of its two larger rivals. According to Strategy Analytics, the formidable new company would have approximately 126 million customers, compared to 150 million for Verizon and 142 million for AT&T.

At that scale, a combined T-Mobile/Sprint would be able to produce much higher profit margins than either company could alone, driven in part by an estimated $6 billion in annual cost synergies. And T-Mobile would eliminate a rival that’s historically been aggressive in terms of discounting. Thus, the combined company would likely be able to offer fewer promotions, which could further boost margins.

Moreover, the merged entity would be able to make better use of Sprint’s valuable spectrum holdings, as its stronger cash flow would allow it to more quickly deploy these assets. In addition, it would possess a larger network of retail stores, which T-Mobile has identified as an important growth driver.

Perhaps most interestingly, the two companies say that if they’re allowed to merge, they’d be able to “build the first broad and deep nationwide 5G network.” That would boost their ability to profit from the explosive growth of the Internet of Things, and further strengthen their competitive position.

Despite the change of administration in Washington, it’s still unclear whether regulators will sign off on this merger, so these potential benefits may not materialize. Even without such a deal, however, T-Mobile would likely continue to grow its subscriber count and free cash flow at industry-leading rates. And with its stock trading at only about 10 times its expected 2019 free cash flow, T-Mobile’s shares are quite a bargain. Long-term investors may wish to consider buying some T-Mobile stock today.

Many retirees are very dependent on their Social Security benefits, but with the average monthly benefit being only $1,404 this year, it’s clear that most retirees will have many more sources of income if they want to live comfortably.

That’s why it’s important to think about adding some dividend stocks to your retirement portfolio so that you can not only receive some additional income but also build wealth at the same time. To help you get started, let’s take a look at why three very different companies — 3M (NYSE: MMM), Apple (NASDAQ: AAPL), American Tower (NYSE: AMT) — could be great long-term investments for your retirement.

A dividend stock for the ages

Retirees looking for a steady dividend play to add to their portfolio would be wise to give 3M a hard look. The company has been paying a dividend for more than a century and has raised it for a staggering 59 consecutive years. You can certainly earn higher yields with other stocks — 3M’s current forward yield is 2.65% — but you’ll be hard-pressed to find a company with the same long-term thinking that 3M offers.

3M consistently invests about 6% of its sales into its research and development division, which allows the company to bring new products to market continually. The company sells about 60,000 products right now, which include industrial adhesives, Scotch tape, Post-it Notes, and even display films for tech devices.

In the most recent quarter, 3M’s revenue was up 7.7% from the year-ago quarter to $8.3 billion, and adjusted net income popped 15.7% to $2.50 per share. The company’s shares took a bit of a hit, though, as management scaled back its earnings guidance for the full year.

But investors shouldn’t worry. Minor adjustments to the company’s 2018 earnings don’t spell doom for the company’s long-term outlook. 3M is continually investing in new products that should pay off years down the road, and a bumpy quarter won’t change that.

The recent drop in 3M’s share price might best be viewed as a buying opportunity for dividend investors who understand that Wall Street’s fickleness is best left unfollowed.

The tech giant with never-ending business prospects

There was a time when Apple would have seemed like an odd stock for retirees, but ever since the company initiated its dividend in 2012, investors have started to look to this tech giant — with its cash hoard of about $267 billion — as a potential income investment opportunity.

Apple pays a modest 1.4% yield, but it has consistently raised its dividend each year since the payout began. Add to that the fact that Apple’s management authorized a new $100 billion share repurchase program in the latest quarter — and raised its dividend by 16% — and you can start to see the value that this tech play is offering income investors.

Apple is, of course, dependent on sales of its iPhone, which accounted for 62% of the company’s top line in the second quarter. Bears will point to a stagnant smartphone market as a reason to avoid Apple, but they’re missing the company’s growing opportunities from its services sales — which include Apple Music, Apple Pay, and the App Store.

Services revenue was up 31% year over year in the second quarter and accounted for 15% of Apple’s total sales, up from 13% in the year-ago quarter. Investors should also take note of Apple’s sales growth of 16% in the most recent quarter and its diluted earning per share growth of 30%. In addition to the company’s impressive sales growth, increasing services revenue, and its growing dividend, Apple’s shares are trading at just 14 times the company’s earnings. All of the above mean Apple is not only well-positioned for the future, but its shares are in the bargain bin right now.

A cell tower play with rising potential

American Tower has quite a lot to offer retirees. First, the company pays a forward yield of 2.19%, which is on par with the average dividend yields from stocks in the S&P 500, and it has consistently raised its dividend for six consecutive years.

There are other stocks with higher yields and longer dividend histories, to be sure, but investors should know that American Tower is structured as a real-estate investment trust (REIT), which means most of the company’s net income is paid out as dividends.

If American Tower’s yield and REIT structure isn’t tempting enough, consider that AMT is also on the cusp of benefiting from the next generation of wireless communication, called 5G. American Tower owns 160,000 cell tower sites throughout the world, and telecom companies across the globe are already conducting tests of 5G.

When 5G becomes the new standard for wireless communication, it’ll mean that carriers will need to upgrade their networks to handle increased traffic, and that means American Tower should be able to earn more in revenue from renting out additional tower space to carriers.

Even if the 5G trend takes longer to pan out than expected, American Tower’s business is still in fine shape. The majority of the company’s tower sites are located outside of the U.S., and many countries are still utilizing 3G and 4G for most of their communications. All of this means that as data demands expand across the globe — and global carriers upgrade their services — American Tower is poised to benefit for years to come.

Remember this for your retirement

Even if you don’t believe 3M, Apple, or American Tower are the right stocks for you, make sure that as you look for income opportunities, you’re looking at great companies that have the financial stability to continue paying their dividends for years to come. And if you’re still trying to figure out the best strategy for your retirement, consider checking out these articles to help you decide when you should retire, when to take Social Security, how to handle estate planning, and much more.

Best Buy (NYSE: BBY) is one of the most remarkable comeback stories of the past decade. Many people dismissed the company as an early victim of e-commerce growth.

While investors left Best Buy for dead, the company was hard at work slashing prices, increasing its own e-commerce chops, and cutting costs. The company has also been investing in initiatives such as better customer service, price matching, and faster delivery to better compete in an online world. Those steps continue to pay off, as Best Buy reported results that exceeded expectations.

What happened this quarter?

One of the most notable metrics for the quarter was comparable sales, which jumped 7.1% year over year, continuing the impressive growth of 9% it achieved last quarter and well above the 3% year-over-year gain expected by analysts. International comps also were strong, up 6.4%.

These comps helped drive revenue and earnings growth that outperformed both the analyst consensus and management’s own forecast for the quarter.

It was just three months ago that Best Buy guided for revenue in a range of $8.65 billion to $8.75 billion, enterprise and domestic same-store sales growth of 2% at the midpoint, and international comps in a range of flat to 3%. The company also expected adjusted earnings per share of between $0.68 and $0.73, so the company surpassed all its own internal benchmarks.

Online sales were also in the limelight, up 12% year over year but lower than the 22.5% increase in the year-ago quarter. Best Buy’s CFO Corie Barry said that last year’s sales benefited from gaming console and television launches that skewed the results, and the company gained market share during the quarter.

The investments that produced Best Buy’s remarkable sales growth weighed on the company’s operating income, which declined 20%. The company also said that its investments in future growth, variable expenses resulting from higher revenue, and increased incentive compensation expenses all came into play.

“We are excited by our momentum and continue to believe we are operating in an opportunity-rich environment driven by technological innovation and customers’ need for help,” said Hubert Joly, Best Buy chairman and CEO. “We are focused on providing services and solutions that solve real customer needs, and on building deeper customer relationships.”

Looking ahead
For the current quarter, Best Buy is forecasting revenue of $9.15 billion, which is at the midpoint of its guidance and represents 2.3% year-over-year growth. The company expects comparable-store sales growth in a range of 3% to 4%. This will produce adjusted earnings per share between $0.77 and $0.82, which would represent year-over-year growth of between 12% and 19%.

The stock sold off shortly after the report, likely due to slowing growth of Best Buy’s online sales and because the company elected not to increase its full-year guidance despite the strong start to its fiscal year. Management appears to be erring on the side of caution.

Best Buy CFO Corie Barry said investors shouldn’t read anything into that. “We just felt like there’s so much of the year still in front of us … We are trending toward the higher end of our revenue range.” I think Best Buy management is being prudent by waiting to increase the forecast.

The big box retailer has delivered far better results recently than anyone expected. This quarter was another solid entry in the company’s ongoing transition.