Both Costco Wholesale(COST 0.86%) and BJ’s Wholesale Club(BJ 0.60%) stocks are beating the market in 2022, and it isn’t hard to see why. Consumers are focused on saving money, and an inflationary environment tends to make the warehouse retailers’ value propositions more obvious.
These companies seem ideally positioned to ride out a potential recession, and earnings growth might be especially strong if the economy avoids that scenario. But which one is the better buy heading into 2023?
Stability vs. potential
Both companies are growing at an impressive pace today, with comparable-store sales rising in the mid-single digits on top of booming sales gains a year ago. Their consumer staples focus has allowed Costco and BJ’s to avoid the type of challenges that hurt less-diversified retailers like Target and Home Depot. In contrast to these businesses, the wholesale clubs are seeing increased customer traffic and higher average spending.
But BJ’s has a slight advantage on the growth front because of its smaller sales footprint. Strong customer traffic trends over the last few years imply the chain can expand out of its current regional focus to reach more metropolitan areas.
On the other hand, Costco’s maturity and massive scale provide stability, which might be valuable if a recession develops in major markets like the U.S. in 2023. But Costco already has established itself in most major metro areas, so its expansion options are more limited.
Earnings outlook
Both companies rely almost exclusively on membership fees to power profits, which gives Costco and BJ’s another advantage over other retailer peers. Earnings won’t collapse during slower consumer spending times, since they aren’t tied to merchandise markups.
Yet Costco has the brighter outlook here. The company is just about due for an increase to its annual membership fees after several years of those charges holding steady. Subscribers are clearly getting tons of value from their memberships, too.
Costco just reported that its renewal rate ticked up in late 2022 beyond to roughly 92%. That means there is room for the chain to increase its fees in 2023, immediately boosting its earnings.
The better value?
Costco is valued at a large premium compared to BJ’s, which reflects a few of its unique competitive assets, like its huge global base of paying members. You can own BJ’s shares for 0.5 times annual sales, compared to 0.9 times sales for Costco.
In my view, that premium shouldn’t scare you away from this stellar stock. While Costco isn’t immune to recessions, its sales and earnings should hold up far better than most of its industry peers. Combine that factor with its ability to increase annual fees over time, and you’ve got all the ingredients you need for market-thumping returns.
Sure, BJ’s Wholesale Club could notch faster growth over the next few years as it opens warehouses in new geographies. But Costco’s shares, which became cheaper through 2022, seem more attractive for holding through a wide range of potential selling environments that investors could see over the next several years. Both companies are winners right now, but the industry leader seems like the less-risky choice.
Demitri Kalogeropoulos has positions in Costco Wholesale and Home Depot. The Motley Fool has positions in and recommends Costco Wholesale, Home Depot, and Target. The Motley Fool has a disclosure policy.
PLC, according to people familiar with the matter, in a takeover likely to be valued at well over $20 billion and mark the largest healthcare merger of the year.
The U.S. biotechnology company was the last of three suitors standing in an auction for Horizon, the people said, after French drugmaker
Sanofi SA
said Sunday it was out of the running.
A deal could be finalized by Monday assuming the talks with Amgen don’t fall apart, the people said.
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Horizon develops medicines to treat rare autoimmune and severe inflammatory diseases that are currently sold mostly in the U.S. Its biggest drug, Tepezza, is used to treat thyroid eye disease, an affliction characterized by progressive inflammation and damage to tissues around the eyes.
The company is Nasdaq-listed, but based in Ireland and has operations in Dublin, Deerfield, Ill., and a new facility in Rockville, Md.
Horizon said last month it was fielding takeover interest from Amgen, Sanofi and
Johnson & Johnson,
a disclosure prompted by a Wall Street Journal report.
Johnson & Johnson later said it had dropped out.
Last year, revenue from Tepezza more than doubled, driving Horizon’s overall net sales 47% higher to $3.23 billion. Horizon has said that annual global net sales of the drug are targeted to eventually peak at more than $4 billion as the company aims to win approval to sell it in Europe and Japan.
That type of growth is attractive to big drug companies—with many sitting on big piles of cash—that rely on acquisitions as a key strategy to expand sales. Many big drugmakers are looking for new sources of revenue to offset losses when some of their main products lose patent protection.
Analysts expect Amgen will lose sales when patents begin expiring on its big-selling osteoporosis drugs Prolia and Xgeva later this decade. The pair of drugs accounted for nearly $5.3 billion of Amgen’s $26 billion in revenue last year.
In October, Amgen completed a $3.7 billion deal for ChemoCentryx and its drug to treat a rare immune-system disease.
Adding Horizon would provide more rare immune-disease drugs to Amgen’s lineup, which also includes the biotech’s Enbrel and Otezla immune-disease therapies. Amgen could help sell more of Horizon’s products overseas, according to analysts.
Acquiring Horizon could add about $4 billion in new revenue for Amgen by 2024, according to Jefferies & Co.
Other big life-sciences companies have been inking deals in recent months.
Johnson & Johnson recently struck a $16.6 billion deal to acquire heart device maker Abiomed Inc. to bolster sales of its medical-gear division, which had been lagging behind those of its pharmaceutical unit.
Merck
& Co. followed with a deal of its own, agreeing to buy blood-cancer biotech
Imago BioSciences Inc.
for $1.35 billion, ahead of the patent expiration of its cancer immunotherapy Keytruda.
Pfizer Inc.,
meanwhile, agreed in August to buy Global Blood Therapeutics Inc. for $5.4 billion, in a deal that would give the big drugmaker a foothold in the treatment of sickle-cell disease.
A deal for Horizon would likely rank as the largest healthcare acquisition globally in 2022, ahead of the Johnson & Johnson-Abiomed tie-up. The selloff in stocks this year amid rising interest rates, while putting a damper on deal activity, has also made some companies more attractive targets. At the stock’s peak about a year ago, Horizon was valued at roughly $27 billion.
The shares, which fell sharply earlier this year, have surged since the possibility of a takeover surfaced, and the company now has a market value of about $22 billion.
Horizon’s other drugs include Krystexxa for treating gout, a form of inflammatory arthritis, and Ravicti for a rare, potentially life-threatening genetic disease known as urea cycle disorder that raises ammonia levels in the blood.
Drugs treating rare diseases have emerged as a large source of pharmaceutical sales because they can command high prices that health insurers have been willing to pay.
Write to Ben Dummett at ben.dummett@wsj.com, Dana Cimilluca at dana.cimilluca@wsj.com and Laura Cooper at laura.cooper@wsj.com
Traders work on the floor of the New York Stock Exchange (NYSE), December 7, 2022.
Brendan McDermid | Reuters
Stock futures were flat Thursday evening as investors look ahead to new inflation data due Friday.
Futures tied to the Dow Jones Industrial Average fell 21 points, or 0.06%. S&P 500 futures and Nasdaq 100 futures were down 0.05% and 0.06%, respectively. Shares of Lululemon fell more than 7% after the company gave a weaker-than-expected fourth-quarter outlook, even though it beat Wall Street expectations with its third-quarter results.
Earlier in the day, the S&P 500 rallied to break a five-day run of losses — its longest streak since October. The broad-market index gained 0.75%, and the Dow gained 183.56 points, or 0.55%. The Nasdaq had the strongest performance of the day, rallying 1.13%.
Even with Thursday’s gains, all three major averages are on track to post losses for the week. The S&P 500 is off by 2.6% for the week, while the Nasdaq is down more than 3%. The Dow shed 1.8%.
Next, investors are awaiting the Friday release of the November producer price index report, which will give further information about how the Federal Reserve’s interest rate hikes are working to tame high inflation.
“[The stock market] really has been so dependent on inflation this year and it’s likely to continue to depend on inflation,” said Courtney Garcia, senior wealth advisor at Payne Capital Management, on CNBC’s “Fast Money” on Thursday.
Next week, more inflation data and a Federal Reserve meeting are top of mind for traders. The November consumer price index report due Dec. 13 will further show if inflation is subsiding.
The central bank is widely expected to deliver a smaller interest rate hike of 0.5 percentage point on Dec. 14, the last day of its December meeting.
Income-seeking investors are looking at an opportunity to scoop up shares of real estate investment trusts. Stocks in that asset class have become more attractive as prices have fallen and cash flow is improving.
Below is a broad screen of REITs that have high dividend yields and are also expected to generate enough excess cash in 2023 to enable increases in dividend payouts.
REIT prices may turn a corner in 2023
REITs distribute most of their income to shareholders to maintain their tax-advantaged status. But the group is cyclical, with pressure on share prices when interest rates rise, as they have this year at an unprecedented scale. A slowing growth rate for the group may have also placed a drag on the stocks.
And now, with talk that the Federal Reserve may begin to temper its cycle of interest-rate increases, we may be nearing the time when REIT prices rise in anticipation of an eventual decline in interest rates. The market always looks ahead, which means long-term investors who have been waiting on the sidelines to buy higher-yielding income-oriented investments may have to make a move soon.
During an interview on Nov 28, James Bullard, president of the Federal Reserve Bank of St. Louis and a member of the Federal Open Market Committee, discussed the central bank’s cycle of interest-rate increases meant to reduce inflation.
When asked about the potential timing of the Fed’s “terminal rate” (the peak federal funds rate for this cycle), Bullard said: “Generally speaking, I have advocated that sooner is better, that you do want to get to the right level of the policy rate for the current data and the current situation.”
Fed’s Bullard says in MarketWatch interview that markets are underpricing the chance of still-higher rates
In August we published this guide to investing in REITs for income. Since the data for that article was pulled on Aug. 24, the S&P 500
SPX,
-0.50%
has declined 4% (despite a 10% rally from its 2022 closing low on Oct. 12), but the benchmark index’s real estate sector has declined 13%.
REITs can be placed broadly into two categories. Mortgage REITs lend money to commercial or residential borrowers and/or invest in mortgage-backed securities, while equity REITs own property and lease it out.
The pressure on share prices can be greater for mortgage REITs, because the mortgage-lending business slows as interest rates rise. In this article we are focusing on equity REITs.
Industry numbers
The National Association of Real Estate Investment Trusts (Nareit) reported that third-quarter funds from operations (FFO) for U.S.-listed equity REITs were up 14% from a year earlier. To put that number in context, the year-over-year growth rate of quarterly FFO has been slowing — it was 35% a year ago. And the third-quarter FFO increase compares to a 23% increase in earnings per share for the S&P 500 from a year earlier, according to FactSet.
The NAREIT report breaks out numbers for 12 categories of equity REITs, and there is great variance in the growth numbers, as you can see here.
FFO is a non-GAAP measure that is commonly used to gauge REITs’ capacity for paying dividends. It adds amortization and depreciation (noncash items) back to earnings, while excluding gains on the sale of property. Adjusted funds from operations (AFFO) goes further, netting out expected capital expenditures to maintain the quality of property investments.
The slowing FFO growth numbers point to the importance of looking at REITs individually, to see if expected cash flow is sufficient to cover dividend payments.
Screen of high-yielding equity REITs
For 2022 through Nov. 28, the S&P 500 has declined 17%, while the real estate sector has fallen 27%, excluding dividends.
Over the very long term, through interest-rate cycles and the liquidity-driven bull market that ended this year, equity REITs have fared well, with an average annual return of 9.3% for 20 years, compared to an average return of 9.6% for the S&P 500, both with dividends reinvested, according to FactSet.
This performance might surprise some investors, when considering the REITs’ income focus and the S&P 500’s heavy weighting for rapidly growing technology companies.
For a broad screen of equity REITs, we began with the Russell 3000 Index
RUA,
-0.18%,
which represents 98% of U.S. companies by market capitalization.
We then narrowed the list to 119 equity REITs that are followed by at least five analysts covered by FactSet for which AFFO estimates are available.
If we divide the expected 2023 AFFO by the current share price, we have an estimated AFFO yield, which can be compared with the current dividend yield to see if there is expected “headroom” for dividend increases.
For example, if we look at Vornado Realty Trust
VNO,
+1.01%,
the current dividend yield is 8.56%. Based on the consensus 2023 AFFO estimate among analysts polled by FactSet, the expected AFFO yield is only 7.25%. This doesn’t mean that Vornado will cut its dividend and it doesn’t even mean the company won’t raise its payout next year. But it might make it less likely to do so.
Among the 119 equity REITs, 104 have expected 2023 AFFO headroom of at least 1.00%.
Here are the 20 equity REITs from our screen with the highest current dividend yields that have at least 1% expected AFFO headroom:
Company
Ticker
Dividend yield
Estimated 2023 AFFO yield
Estimated “headroom”
Market cap. ($mil)
Main concentration
Brandywine Realty Trust
BDN,
+1.82%
11.52%
12.82%
1.30%
$1,132
Offices
Sabra Health Care REIT Inc.
SBRA,
+2.02%
9.70%
12.04%
2.34%
$2,857
Health care
Medical Properties Trust Inc.
MPW,
+1.90%
9.18%
11.46%
2.29%
$7,559
Health care
SL Green Realty Corp.
SLG,
+2.18%
9.16%
10.43%
1.28%
$2,619
Offices
Hudson Pacific Properties Inc.
HPP,
+1.55%
9.12%
12.69%
3.57%
$1,546
Offices
Omega Healthcare Investors Inc.
OHI,
+1.30%
9.05%
10.13%
1.08%
$6,936
Health care
Global Medical REIT Inc.
GMRE,
+2.03%
8.75%
10.59%
1.84%
$629
Health care
Uniti Group Inc.
UNIT,
+0.28%
8.30%
25.00%
16.70%
$1,715
Communications infrastructure
EPR Properties
EPR,
+0.62%
8.19%
12.24%
4.05%
$3,023
Leisure properties
CTO Realty Growth Inc.
CTO,
+1.58%
7.51%
9.34%
1.83%
$381
Retail
Highwoods Properties Inc.
HIW,
+0.76%
6.95%
8.82%
1.86%
$3,025
Offices
National Health Investors Inc.
NHI,
+1.90%
6.75%
8.32%
1.57%
$2,313
Senior housing
Douglas Emmett Inc.
DEI,
+0.33%
6.74%
10.30%
3.55%
$2,920
Offices
Outfront Media Inc.
OUT,
+0.70%
6.68%
11.74%
5.06%
$2,950
Billboards
Spirit Realty Capital Inc.
SRC,
+0.72%
6.62%
9.07%
2.45%
$5,595
Retail
Broadstone Net Lease Inc.
BNL,
-0.93%
6.61%
8.70%
2.08%
$2,879
Industial
Armada Hoffler Properties Inc.
AHH,
-0.08%
6.38%
7.78%
1.41%
$807
Offices
Innovative Industrial Properties Inc.
IIPR,
+1.09%
6.24%
7.53%
1.29%
$3,226
Health care
Simon Property Group Inc.
SPG,
+0.95%
6.22%
9.55%
3.33%
$37,847
Retail
LTC Properties Inc.
LTC,
+1.09%
5.99%
7.60%
1.60%
$1,541
Senior housing
Source: FactSet
Click on the tickers for more about each company. You should read Tomi Kilgore’s detailed guide to the wealth of information for free on the MarketWatch quote page.
The list includes each REIT’s main property investment type. However, many REITs are highly diversified. The simplified categories on the table may not cover all of their investment properties.
Knowing what a REIT invests in is part of the research you should do on your own before buying any individual stock. For arbitrary examples, some investors may wish to steer clear of exposure to certain areas of retail or hotels, or they may favor health-care properties.
Largest REITs
Several of the REITs that passed the screen have relatively small market capitalizations. You might be curious to see how the most widely held REITs fared in the screen. So here’s another list of the 20 largest U.S. REITs among the 119 that passed the first cut, sorted by market cap as of Nov. 28:
Company
Ticker
Dividend yield
Estimated 2023 AFFO yield
Estimated “headroom”
Market cap. ($mil)
Main concentration
Prologis Inc.
PLD,
+1.29%
2.84%
4.36%
1.52%
$102,886
Warehouses and logistics
American Tower Corp.
AMT,
+0.68%
2.66%
4.82%
2.16%
$99,593
Communications infrastructure
Equinix Inc.
EQIX,
+0.62%
1.87%
4.79%
2.91%
$61,317
Data centers
Crown Castle Inc.
CCI,
+1.03%
4.55%
5.42%
0.86%
$59,553
Wireless Infrastructure
Public Storage
PSA,
+0.11%
2.77%
5.35%
2.57%
$50,680
Self-storage
Realty Income Corp.
O,
+0.26%
4.82%
6.46%
1.64%
$38,720
Retail
Simon Property Group Inc.
SPG,
+0.95%
6.22%
9.55%
3.33%
$37,847
Retail
VICI Properties Inc.
VICI,
+0.41%
4.69%
6.21%
1.52%
$32,013
Leisure properties
SBA Communications Corp. Class A
SBAC,
+0.59%
0.97%
4.33%
3.36%
$31,662
Communications infrastructure
Welltower Inc.
WELL,
+2.37%
3.66%
4.76%
1.10%
$31,489
Health care
Digital Realty Trust Inc.
DLR,
+0.69%
4.54%
6.18%
1.64%
$30,903
Data centers
Alexandria Real Estate Equities Inc.
ARE,
+1.38%
3.17%
4.87%
1.70%
$24,451
Offices
AvalonBay Communities Inc.
AVB,
+0.89%
3.78%
5.69%
1.90%
$23,513
Multifamily residential
Equity Residential
EQR,
+1.10%
4.02%
5.36%
1.34%
$23,503
Multifamily residential
Extra Space Storage Inc.
EXR,
+0.29%
3.93%
5.83%
1.90%
$20,430
Self-storage
Invitation Homes Inc.
INVH,
+1.58%
2.84%
5.12%
2.28%
$18,948
Single-family residental
Mid-America Apartment Communities Inc.
MAA,
+1.46%
3.16%
5.18%
2.02%
$18,260
Multifamily residential
Ventas Inc.
VTR,
+1.63%
4.07%
5.95%
1.88%
$17,660
Senior housing
Sun Communities Inc.
SUI,
+2.09%
2.51%
4.81%
2.30%
$17,346
Multifamily residential
Source: FactSet
Simon Property Group Inc.
SPG,
+0.95%
is the only REIT to make both lists.
, the used-car dealer that was a pandemic winner, is rushing to conserve cash as once-plentiful financing options dry up and business deteriorates.
On Friday, Carvana laid off about 1,500 people, its second round in six months. Its weakening finances mean raising funds would be difficult and costly, and it could run out of cash in a year, analysts say.
Few companies have been hit harder by rising interest rates than Carvana. The company’s interest expense nearly doubled early this year when it paid up to get financing for an acquisition. Its cost to finance car purchases is up by three-quarters this year, and some of its real estate has lost value. Car buyers, meanwhile, are holding off purchases in the hope that rates fall.
In a memo to Carvana’s employees announcing the layoffs, Chief Executive
Ernie Garcia III
blamed an uncertain economic environment that he said was particularly tough on fast-growing companies that sell products affected by higher interest rates. “We failed to accurately predict how this would all play out and the impact it would have on our business,” he said.
The company said it has millions of satisfied customers, and that disrupting the auto industry isn’t easy. “We have seen many e-commerce companies written off early in their journey only to become market leaders. We plan to follow suit,” a spokesman said. Earlier this month, Carvana executives said cash flows and profitability are the strategic focus now.
WSJ’s Ben Foldy explains the factors that helped drive Carvana’s growth and why investors are now questioning its future. Illustration: Preston Jessee
Carvana became wildly popular among car buyers, with heavy advertising and haggle-free cars delivered to their doors. Investors bought in, driving the shares up more than sixfold. The stock has fallen more than 97% from its peak last year. Carvana’s bonds are trading at distressed levels.
“They built an infrastructure across the enterprise with the assumption that the growth would be there,” said Daniel Imbro, a managing director at Stephens Inc.
The ratings firm S&P Global Ratings warned that Carvana’s liquidity likely would erode faster than expected, and changed the outlook on its CCC+ rating to negative earlier this month. It said the company’s standing to raise more cash from stock and bond investors has deteriorated.
Less than a year ago, Carvana was still trying to keep up with demand. In February, it agreed to buy a car-auction business that would help boost inventory. Car sales slowed, though.
The day the deal was completed in May, Mr. Garcia said it had overshot on growth and laid off 2,500 workers. Days earlier, it had issued a $3.275 billion bond with a 10.25% coupon to fund the purchase. The high coupon almost doubled Carvana’s annual interest expense and reflected investors’ fears of a recession and rising inflation.
Carvana CEO Ernie Garcia III and his father, Ernest Garcia II, when the company went public in 2017.
Photo:
Michael Nagle/Bloomberg News
Carvana thrived when interest rates were low because it could borrow cheaply to buy cars and make loans to customers. Its credit line from
Ally Financial
to buy cars had an average 2.6% interest rate last year, compared with 4.5% at the end of September. Ally required Carvana to set aside 12.5% of the amount borrowed as of late September, up from 7.5%, further tightening its cash situation. An Ally spokesman declined to comment.
Carvana earned big profits selling its car loans to investors who were hungry for yield. Gains from the loans help Carvana offset the losses it makes selling cars. When investors turned choosier on these securities in the spring, Carvana sold many of the loans to Ally instead, on less-favorable terms. The gains it books from loan sales fell by around one-third in the third quarter from the year-earlier period.
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Mr. Garcia told analysts on a call Nov. 3 that the company would keep cutting costs and that it has access to around $4 billion in liquidity, in addition to its $316 million cash and some other assets. The amount includes what it can borrow on credit lines to buy cars and make loans. It also included around $2 billion of real estate, which isn’t typically considered a liquid asset.
The company’s chief financial officer said Carvana could borrow against the real estate, which includes sites it bought this year. It previously raised around $500 million from selling some sites where it inspects cars and then leasing them back for 20 or 25 years.
That step might work, analysts said, but would also add expenses. They said any real-estate deals would likely occur piecemeal over time, or involve high rent payments because of Carvana’s credit troubles.
Scott Merkle, a managing partner at SLB Capital Advisors, which specializes in sale-leaseback transactions, said the long-term leases in the space generally rely on financially sound tenants that can be expected to make their lease payments for years. He said that overall conditions for sellers have softened in that market because of higher interest rates, but that sale-leasebacks still provide a better cost of capital for companies than other financing.
Carvana said it is testing ways to make more from its car sales, such as having customers pick up cars from its vending machines.
Photo:
USA TODAY NETWORK/Reuters
Some Carvana-leased properties have received a tepid response on the market. A 12-story “flagship” car-vending machine in Atlanta that Carvana sold and leased back in December was relisted this summer. It is still on the market, and the asking price has since been lowered.
Carvana said it is testing ways to make more from its car sales, such as taking payment before delivery and having customers pick up cars from its vending machines.
“We’ve got a bunch of committed liquidity. We’ve got a bunch of real estate, and I think that we feel like that puts us in a good position to ride out this storm,” Mr. Garcia told analysts on the Nov. 3 call.
—Ben Foldy, Will Feuer and Ben Eisen contributed to this article.
Write to Margot Patrick at margot.patrick@wsj.com and Kristin Broughton at Kristin.Broughton@wsj.com
said consumers pulled back on their spending in recent weeks, sapping sales and profits in the latest quarter and putting a cloud over its holiday season.
Quarterly profits came in below Target’s forecasts and the company’s sales growth lagged behind larger rival
Walmart Inc.
WMT 0.72%
in the period. Target executives lowered their financial goals for the holiday quarter and said they are prepared to offer deep discounts in the coming months to clear out unwanted inventory and attract shoppers.
Target shares dropped 13% in Wednesday trading on the earnings, which came in well below Wall Street’s estimates. It is the second time this year the retailer has misjudged consumer demand—in the spring executives said they were surprised by shifts away from furniture and appliances.
Government data released Wednesday showed that retail spending, including purchases at restaurants, car dealers and gas stations, rose 1.3% in October from September. The data aren’t adjusted for inflation and the government earlier reported that consumer prices rose 7.7% in October from a year earlier.
Target executives said that sales worsened sharply in October and November with guests’ shopping behaviors increasingly affected by inflation, rising interest rates and economic uncertainty.
“Clearly it’s an environment where consumers have been stressed,” said Target Chief Executive
Brian Cornell
on a call with reporters. “We know they are spending more dollars on food and beverage and household essentials, and as they are shopping for discretionary categories they are looking for promotions.”
Target executives said consumers are waiting to purchase items until they spot a deal, buying smaller pack sizes and giving priority to family needs. Sales of food, beverage, beauty products and seasonal items were strong, they said.
Retailers are facing an uncertain holiday season with high food and gas prices pinching some households. Target, like many of its peers, has been discounting to try to clear out a glut of goods this summer. Target’s inventory rose 14.4% in the October quarter from a year ago, while its revenue rose 3.4%. Quarterly net income tumbled by half.
“We are committed to being clean at the end of the holiday season,” regarding excess inventory, said Target Chief Financial Officer
Michael Fiddelke,
on a call with analysts Wednesday. If consumer trends of recent weeks persist, “it will come with more markdowns to make sure we accomplish exactly that goal.”
Rival TJX Cos. reported mixed quarterly results on Wednesday, with lower sales and higher profit margins. The off-price retailer said its U.S. comparable-store sales declined 2% in the quarter, as gains in its Marshalls and T.J. Maxx apparel chains were offset by a drop in its HomeGoods chain.
TJX said it was comfortable with its inventory levels heading into the holidays and said it now expected U.S. comparable-store sales to be flat or up 1% from a year ago.
Walmart gets over half of its U.S. revenue from groceries, while Target’s business is more skewed toward discretionary categories such as home goods, apparel, electronics and beauty products. As consumers absorb higher prices, many are pulling back spending where they can.
Consumer spending has held up relatively well so far despite inflation, but experts say we’re approaching an inflection point. WSJ’s Sharon Terlep explains the role “elasticity” plays in a company’s decision on whether to raise prices. Photo illustration: Adele Morgan
For the most recent quarter, Target said comparable sales, those from stores and digital channels operating at least 12 months, rose 2.7% in the quarter ended Oct. 29 compared with the same period last year.
On Tuesday Walmart said U.S. comparable sales rose 8.2% in the quarter. Walmart executives said the retailer is attracting more higher-income shoppers as many shift spending away from discretionary categories to food and look for value.
Target said it is gaining market share in its five main categories, even as consumers pull back spending in some cases. Existing shoppers are buying more and visiting more frequently, said Christina Hennington, Target’s chief growth officer. Traffic to stores increased 1.4% in the most recent quarter.
This year Target expects a hit to its gross margin of around $600 million due to shrink, the industry term for theft and other product loss, said Mr. Fiddelke. “We’ve seen that trend has grown over the course of the year,” he said.
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Target, which surprised investors by slashing its forecasts twice in the spring, on Wednesday reduced its sales and profits expectations for its fiscal year, which ends in January.
“We expect the challenging environment to linger on beyond the holiday,” said Mr. Fiddelke.
The company now expects a low-single-digit percentage decline in comparable sales and an operating margin around 3% for the fourth quarter. In August Target said sales would grow in the low- to mid-single-digit percentage range for the full year and operating margin would be around 6% for the second half of the year.
Target executives said they would look to cut at least $2 billion in costs over three years. Executives said the company isn’t planning major layoffs or hiring freezes as part of the new cost-cutting program, but streamlining processes inside the company.
has agreed to pay $3.1 billion to settle opioid-crisis lawsuits brought by several U.S. states and municipalities, adding to a landmark settlement with rival pharmacy chains.
The agreement resolves a collection of lawsuits brought by states, cities and Native American tribes. Earlier this month,
CVS Health Corp.
CVS 1.08%
and
Walgreens
WBA 1.75%
Boots Alliance Inc. agreed to pay roughly $5 billion apiece to settle the lawsuits. The companies didn’t admit wrongdoing in their deals.
The Walmart agreement was announced the same morning that the retail giant reported its latest quarterly results. The company said it took $3.3 billion in charges in the last quarter related to opioid settlements.
Walmart reported stronger-than-expected sales in the October-ended quarter and raised sales and profit goals for the year, signs the big discount chain is drawing in shoppers despite high inflation. Walmart shares rose over 8% in midmorning trading.
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Each state, local government and tribe will need to decide whether to participate in the settlement. Plaintiff’s attorneys that lead negotiations are encouraging them to do so, saying the payments hold the pharmacies accountable for their alleged roles in the opioid abuse.
Walmart said that it strongly disputes allegations made in the lawsuits and that the settlement isn’t an admission of liability. The company said its settlement payments will reach communities faster than other deals. CVS is paying out over 10 years, and Walgreens over 15 years.
Walmart has roughly half as many locations as either CVS or Walgreens, which combined have roughly 19,000 U.S. drugstores. Walmart has faced scrutiny from the federal government related to how it prescribed opioids.
The Justice Department filed a lawsuit in December 2020 over its alleged role in the opioid crisis, claiming Walmart sought to boost profits by understaffing its pharmacies and pressuring employees to fill prescriptions quickly. The settlement with the states doesn’t cover the federal case, which Walmart has sought to have dismissed.
The Justice Department sued Walmart a few months after the company had pre-emptively sued the federal government, saying the Justice Department and Drug Enforcement Administration were attempting to scapegoat the company for their failings. Walmart’s suit was dismissed in February 2021. Walmart appealed the dismissal, but lost that case late last year.
Opioid abuse has claimed more than half a million lives and triggered more than 3,000 lawsuits by governments, hospitals and others against players in the pharmaceutical industry, including manufacturers, distributors and drugstores.
The fact that Walmart will pay out funds almost immediately rather than over a decade or more “is particularly noteworthy considering that Walmart dispensed fewer opioids, and at lower dosages, than the other pharmacy defendants,” said lawyer
Paul Geller,
of Robbins Geller, a who is representing local communities.
Write to Sharon Terlep at sharon.terlep@wsj.com and Sarah Nassauer at Sarah.Nassauer@wsj.com
is leaving the department-store chain early next month to join
Levi Strauss
LEVI -2.12%
& Co. with plans to have her take over as the jeans maker’s CEO.
At Kohl’s, Ms. Gass has been under attack from activist investors for sales declines and a steep drop in the company’s stock price. In September, activist investor Ancora Holdings Inc., urged the company to replace Ms. Gass and its chairman. Kohl’s shares, down nearly 40% on the year, jumped 8% in early Tuesday trading.
Ms. Gass will leave Kohl’s Dec. 2 and join Levi Jan. 2, where she will serve as president with oversight of Levi’s brand and global digital and commercial operations. The 54-year-old will succeed Levi’s CEO
Chip Bergh
within 18 months, the company said. Mr. Bergh, who is 65 years old, has run Levi Strauss since 2011.
Kohl’s appointed
Tom Kingsbury
to serve as interim CEO until a permanent successor is named. Mr. Kingsbury is a former
Burlington Stores Inc.
CEO who joined Kohl’s board in 2021 as part of a settlement with activists. In a statement, Ancora said it was the right time to find new leadership and it was pleased that Mr. Kingsbury was the interim CEO.
Kohl’s also released preliminary results for the quarter ended Oct. 29. The company said that same-store sales decreased 6.9% compared with a year earlier. Net sales fell 7.2%. The company earned 82 cents a share compared with $1.65 a share.
It plans to report full results on Nov. 17.
Kohl’s, with roughly 1,100 stores, has struggled to attract shoppers amid rising competition from discounters, fast-fashion chains and online competitors. Earlier this year, Kohl’s scrapped plans to sell itself to the owner of Vitamin Shoppe—in a debt-funded deal initially worth $8 billion but later reduced. The company’s market capitalization has fallen to around $3 billion.
Ms. Gass wasn’t schooled in the art of selling clothes. She studied chemical engineering at Worcester Polytechnic Institute and received a master’s in business administration from the University of Washington. She then spent six years honing her marketing skills at
Procter & Gamble Co.
before joining
Starbucks Corp.
in 1996.
When she departed the coffee chain after nearly 17 years, founder
Howard Schultz
credited her with helping develop such products as the Frappuccino.
Ms. Gass joined Kohl’s in 2013 as chief customer officer with responsibility for marketing and the e-commerce business. In 2015, her role expanded to chief merchandising officer, and in 2018 she took over as CEO and joined the board.
Ms. Gass had some early success at the helm of Kohl’s, telling her team that they needed to think differently and shouldn’t be afraid to try new ideas. She formed a partnership with
Amazon.com Inc.
that allowed shoppers to use Kohl’s stores to return goods bought at the online retailer. Last year, she wooed Sephora away from JCPenney, where it had operated shops for more than a decade.
She overhauled the merchandise, dropping poorly performing brands such as Dana Buchman, and bringing in new ones, including Tommy Hilfiger, Eddie Bauer and Cole Haan. She expanded the selection of activewear from brands such as
Nike Inc.,
Adidas AG and
Under Armour Inc.
Ms. Gass also simplified discounts and pricing and is refurbishing stores. The company is on track to repurchase $1.3 billion in stock in the current fiscal year.
Yet, the moves haven’t improved Kohl’s business enough to satisfy some shareholders. While sales initially increased, they had started to decline even before the pandemic forced retailers to temporarily shut stores and kept consumers homebound. The company has faced two years with activist investors calling for board changes.
—Dean Seal and Lauren Thomas contributed to this article.
is nearing a deal to combine with a big owner of medical practices and urgent-care centers in a transaction worth roughly $9 billion including debt, according to people familiar with the matter, the latest in a string of acquisitions by big consumer-focused companies aiming to delve deeper into medical care.
The drugstore giant’s primary-care-center subsidiary, Village Practice Management, would combine with Summit Health, the parent company of CityMD urgent-care centers, in an agreement that could be reached as early as Monday, the people said.
Health insurer
Cigna Corp.
CI 0.73%
is expected to invest in the combined company, the people said.
There is no guarantee the parties will reach a deal, the people cautioned, noting that they are still hammering out details of an agreement.
Summit Health, which is backed by private-equity firm Warburg Pincus LLC, has more than 370 locations in New York, New Jersey, Connecticut, Pennsylvania and Central Oregon, according to the company’s website. Current and former physicians also own a large interest in the business.
Village Practice Management, which does business as VillageMD, provides care for patients at free-standing practices as well as at Walgreens locations, virtually and in the home. In 2021, Walgreens announced it had made a $5.2 billion investment in VillageMD, boosting its stake to 63%. At the time, Walgreens said the investment would help accelerate the opening of at least 600 Village Medical at Walgreens primary-care practices across the country by 2025 and 1,000 by 2027.
The expected deal follows a string of mergers involving companies like VillageMD and CityMD as big healthcare providers seek more direct connections with patients.
Amazon.com Inc.
in July agreed to purchase primary-care operator
1Life Healthcare Inc.,
which operates under the name One Medical, for about $4 billion. In September,
CVS Health Corp.
struck a deal to acquire home-healthcare company Signify Healthcare Inc. for $8 billion.
Cano Health Inc.,
which operates primary-care centers, has attracted interest from both CVS and insurer
Humana Inc.
in recent months, The Wall Street Journal has reported.
Bloomberg a week ago reported VillageMD’s interest in Summit Health.
Walgreens appears to have pre-empted a sale process for Summit Health that was set to kick off next year, according to the people, who said the company was about to interview banks before it received interest from VillageMD.
Summit Health has been backed by Warburg Pincus since 2017, when it took a stake in CityMD, a large chain of New York City urgent-care centers.
Since that time, Warburg has helped the company complete multiple transformative acquisitions, including the 2019 merger of CityMD and multi-speciality medical-practice group, Summit Medical Group.
New York-based Warburg, which has more than $85 billion in assets under management, is no stranger to healthcare. The firm counts healthcare-IT business Modernizing Medicine Inc. and Ensemble Health Partners, a revenue-cycle management business for hospitals, among its portfolio companies.
SINGAPORE—Chinese leaders are considering steps toward reopening after nearly three years of tough pandemic restrictions but are proceeding slowly and have set no timeline, according to people familiar with the discussions.
Chinese officials have grown concerned about the costs of their zero-tolerance approach to smothering Covid outbreaks, which has resulted in lockdowns of cities and whole provinces, crushing business activity and confining hundreds of millions of people at home for weeks and sometimes months on end. But they are weighing those against the potential costs of reopening on public health and support for the Communist Party.
As a result, they are proceeding cautiously despite the deepening impact of the Covid policies, the people said, pointing to a long path to anything approaching pre-pandemic levels of activity, with the timeline stretching to sometime near the end of next year.
The uncertainty around China’s Covid-19 strategy has led to a guessing game in the financial markets, with some looking for any sign that China would begin easing its Covid policies. China’s Communist Party congress last month, when Chinese leader
Xi Jinping
claimed a third term, had once been viewed as a potential turning point in its battle against Covid, but little has changed in the country’s approach to containing Covid.
China’s leaders are worried that a surge in Covid infections, hospital admissions and deaths could undermine confidence in the ruling Communist Party’s legitimacy.
Photo:
TINGSHU WANG/REUTERS
On Saturday, officials from China’s National Health Commission again reaffirmed their commitment to a firm “zero-Covid” strategy, which they described as essential to “protect people’s lives.”
Some progress is being made on relaxing border controls for inbound travelers from abroad. Beijing is likely to further cut the number of hotel quarantine days required of incoming travelers by early next year, to a total of seven days, say people involved in discussions, from a current policy of seven days in a quarantine facility followed by three days of home monitoring.
Domestically, officials have informed retail businesses that the frequency of PCR testing—a staple of China’s Covid regime—could be reduced as soon as this month, in part because of the high cost of mass testing, according to people familiar with the matter. The people said the government is planning to reduce the thousands of PCR testing stations that have been set up across the country as part of the campaign to institutionalize testing, citing the cost.
ECONOMIC IMPACT OF COVID IN CHINA AND CHINA’S ZERO-TOLERANCE APPROACH
Still, the leadership has found it difficult to enact broader relaxation measures this year, the people said. Many of the measures will remain. The country will still move aggressively to stamp out even small outbreaks, through mass testing and lockdowns. People will still need to use health codes on their phones to access public spaces, and travelers entering the country will face quarantines and rounds of Covid tests.
A combination of new viral variants, an underequipped public healthcare system and the impending approach of winter has left Beijing worried that a potential surge in Covid infections, hospital admissions and deaths could undermine confidence in the ruling Communist Party’s legitimacy.
Chinese health officials have been closely monitoring the fatality rates and public reactions in Hong Kong, Japan and South Korea, which share cultural roots with China and where governments had until recently imposed similar measures, the people said.
“The reopening in China will be carried out in an orderly manner. It will start gradually depending on the geographic areas and sectors, and it will be different from what we’ve seen in the West,” said one of the people involved in discussions. For example, the government could decide to implement less stringent measures in cities that are major business hubs.
Workers at the world’s biggest assembly site for Apple’s iPhones walked out as Foxconn has struggled to contain a Covid-19 outbreak. The chaos highlights the tension between Beijing’s rigid pandemic controls and the urge to keep production on track. Photo: Hangpai Xinyang/Associated Press
While some have questioned the accuracy of China’s official figures, health experts say the country’s Covid fatality rate has been much lower than in much of the West due to its strict measures. Officially, China has recorded roughly 5,000 Covid-19 deaths, a fraction of the U.S.’s more than 1 million deaths. China’s Communist Party has celebrated its lower official death count as evidence of the superiority of its governance model.
In recent months, Chinese officials have maintained close contact with the World Health Organization, focusing on the alert level that the Geneva-based body has assigned for the Covid-19 pandemic, according to people familiar with the matter.
The WHO’s emergency committee meets once every three months to assess whether the pandemic still constitutes a “public health emergency of international concern.”
A WHO shift in declaration would give China more wiggle room for policy changes. Beijing could start to push for more aggressive easing measures and adjust the domestic narrative on Covid, effectively declaring victory in containing the virus, according to people familiar with the matter.
The WHO first declared a public health emergency of international concern in January 2020, and decided during its latest meeting, held in October, that it is still too early to lift the status. The next meeting is slated for January.
A WHO official said the agency doesn’t comment on private discussions with member states.
One plan under consideration in Beijing, the people said, would be to begin treating Covid-19 as a “Class B” infectious disease following any change in the WHO’s designation. China has been treating it as a Class A disease, which calls for stricter public-health measures.
Even with such a move, it could take China a much longer time—perhaps a year, the people said—to return to pre-pandemic levels of activity. The government wants to continue to monitor new variants closely to ensure that they don’t become more dangerous, they said.
Any further loosening of measures would be contingent on a boost in the elderly vaccination rate. Beijing is planning to launch a vaccination campaign later this year for vulnerable groups, aiming for 95% of people aged 60 or above to receive two doses, some of the people said. The latest government data, from early November, shows 86% of the elderly population had received two vaccine doses, compared with 90% for the broader population.
Another condition for a full reopening of its economy is to boost access to oral antivirals to treat Covid, the people said. Earlier this year, China’s drug regulator granted approval for Azvudine, an HIV drug developed by Chinese drugmaker Henan Genuine Biotech Co., to be used for treating Covid. Drug regulators have also approved
Pfizer Inc.’s
Paxlovid drug.
Any further loosening of measures would be contingent on a boost in the elderly vaccination rate.
Photo:
CHINA DAILY/VIA REUTERS
The National Health Commission responded to a request for comment by referring to remarks made during its Saturday press conference.
There have been some signs of a shift in China’s posture on Covid in recent months. In September, Mr. Xi visited Central Asia, making his first trip outside the country since Covid began spreading in the central Chinese city of Wuhan in early 2020. The Chinese leader has also begun receiving foreign heads of state in Beijing and is expected to attend a summit of leaders from the Group of 20 nations in Indonesia next week.
Still, Beijing has been careful to rein in expectations of a rapid shift, including in the Saturday press conference. In a string of pointed commentaries last month, Communist Party mouthpiece the People’s Daily called for confidence and patience with Beijing’s zero-Covid strategy. Health officials have urged local governments to build quarantine hospitals to prepare for rebounding infections. Shanghai, for example, is building a quarantine facility that can house more than 3,000 people at a cost of just under $200 million, state media reported.
“All the signs are pointing to the beginning of preparation for an eventual reopening, especially given the rising cost of the ‘dynamic zero-Covid’ policy for the economy,”
Goldman Sachs
economists said in a Monday note. “The actual reopening is still months away as elderly vaccination rates remain low and case fatality rates appear high among those unvaccinated based on Hong Kong official data.”
