Wal-Mart Is in Big Trouble; Starbucks Should Buy Chobani

NEW YORK (Real Money Pro) -- Sorry, Target  (TGT) fans, Wal-Mart's  (WMT) horrid start to the year overshadows your latest earnings report.

And it deserves closer inspection. Why? Well, first, Wal-Mart represents the U.S. economy.

I have long held that the Target shopper is the Nordstrom  (JWN) shopper -- that is, someone from a household with a ranch home, a 401(k) and in excess of $150,000 in annual income.

The data would say otherwise, namely that the typical Target shopper rakes in $50,000 but I don't buy it. A visit to Target represents a pricey trip, made so as every aisle is ridiculously tempting with surprises.

Burt's Bees face masks for a low, low price of $10? Sure, why not.  I didn't plan on buying that, but I can't beat the price-valuation equation.

Target is not visited if someone has no money because of the temptation to spend beyond one's means in the store.

Since Wal-Mart is the U.S. economy, what it had to say regarding store traffic (slowed from the holidays), average transaction size (no real lift achieved from cheaper gas prices) and "strong" areas of the store are of great interest. Here are several key takeaways:

Sam's Club continues to be under pressure, as small business owners see no need in stocking offices with tubs of pretzels and packages of pens -- that is, if they even have an office anymore and aren't scrubbing free Wi-Fi while sending pitches inside a Starbucks  (SBUX) outlet.

A struggling Sam's Club store speaks volumes about the state of small businesses in America -- particularly that larger companies continue to realize pressured margins in order to compete globally, which trickles down to the little guys. 

The Fed, as per common knowledge at this point, is data dependent when it comes to its next moves in interest rates. But one data point the Fed should be watching more closely is Wal-Mart's food deflation. Deflation hurt Wal-Mart's U.S. same-store sales in the first quarter, suggesting bargain hunting among consumers persists. How can the Fed raise rates in this type of macro backdrop? The reality is it can't, so let the equities rally continue!

Minimum wage increases are not the magic elixir for driving strong U.S. growth. Still, kudos to Warren Buffett for championing this mantra (I say this with a skeptical look). But in terms of low-wage America, places like Wal-Mart, McDonald's  (MCD) and others are paying their workers more than last year. Yet, this has not yet showed up in the companies' sales or profits. Wal-Mart's food sales didn't spike. Kohl's  (KSS) didn't have a wonderful quarter in basic apparel.

Macy's  (M) warned about the performance of numerous areas of its business. McDonald's sure as heck didn't sell more Big Macs in America in the first quarter due to John Doe's having an extra $5 in his pocket at the end of the week. In the consumer sector, rising wages are the single biggest threat to operating earnings this year, a threat that Wall Street continues to underestimate in models. To overcome that threat, companies will have to prove to Wall Street their sales are receiving a boost from minimum wage increases.

Wal-Mart's earnings estimates have to be reined in. For now, avoid the stock and play the organics foods makers that are gaining shelf space in big-box retailers. One is Hain Celestial  (HAIN).

When you're on top, sometimes you forget about those hungry upstarts trying to toss you off the throne. I think Starbucks had better start paying close attention to Greek yogurt maker Chobani. The company's first retail store in New York City is a head turner in terms of design and is serving products offered by no other big-name company in such a setting. Chobani tells me sales at the local hot spot are up 100% year over year, and it's preparing to launch more venues in the not too distant future.

Personally, I think Starbucks should make a play for Chobani. There is strong alignment between the two brands:

  • Positive social missions.
  • Passionate founders still involved in product development.
  • Both are strong in packaged goods at supermarkets.
  • Acquiring Chobani would give Starbucks a new use occasion and canvas to build out the brand's retail store network.
  • Both have products that align with international interests.

Editor's Note:This article was originally published on Real Money Pro on May 20 at 11 a.m. EDT.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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