Retail Stock Valuations Show Wild Variations
Global retail stock valuations are currently all over the map. Investors face a confusing landscape where multiples range dramatically. Finding a single ideal valuation for retail stocks proves nearly impossible, much like Albert Einstein's failed quest for a unified field theory.
The Valuation Spectrum: 15 to 40 Times Earnings
When examining retail stocks, fair valuation often depends on perspective. Bernstein analyst Zhihan Ma notes that multiples from 15 to 40 times earnings can all make sense in different cases. The market evaluates companies based on both their historical performance and future growth expectations.
Ma explains this clearly in her recent research note. She rates Costco Wholesale as Outperform despite its lofty 41 times estimated 2026 earnings per share. In contrast, she gives Target an Underperform rating even though it trades at just 15.4 times estimated earnings.
What Drives Premium Valuations?
"If you can get same store sales and EPS growth without sacrificing return on invested capital, you're in business," Ma writes. She observes that the most expensive stocks in her coverage typically have the strongest track records of delivering on these fundamental metrics.
Costco earns the title of "ultimate compounder" from Ma. She believes it remains undervalued given its sustainable EPS growth of 12-13% over time. The company maintains a return on equity above 30% long-term. Home Depot shows similar compounding characteristics, while Lowe's is progressing toward that status.
Stocks Trading Against Their History
Several major retailers trade irrespective of their historical patterns. This group includes Walmart, Target, Dollar General, Dollar Tree, and Five Below. Each presents a unique investment case according to Ma's analysis.
While bullish on Walmart, Ma doesn't believe it deserves Costco-level valuation. She expects margin expansion opportunities from e-commerce to eventually slow. EPS growth should normalize from mid-teen levels to mid-to-high single digits, limiting multiple expansion. Still, she sees Walmart justifying around 30 times earnings at more mature earnings levels.
The Target and Dollar Store Dilemmas
Target presents a particular puzzle with its low multiple. Ma maintains her Underperform rating because earnings could deteriorate further despite limited downside. A full turnaround would expand valuation, but no signs of this have emerged yet.
The dollar stores present mixed prospects. Both Dollar General and Dollar Tree are attempting turnarounds that might boost short-term EPS growth. Long-term outcomes remain uncertain. Ma gives Dollar General an Outperform rating due to near-term gross margin upside, though she warns Walmart could pressure it eventually. Dollar Tree receives a Market Perform rating because it lacks a strong competitive moat.
The Bottom Line for Retail Investors
In retail investing, as in many areas, what constitutes a bargain depends entirely on what's being offered. There's no universal multiple that works for all companies. Investors must examine each retailer's specific growth prospects, competitive position, and fundamental performance. The wide valuation range reflects diverse business models and market expectations across the retail sector.
