Question:
I’m concerned with Wal-Mart’s same store sales being down. They appear to keep opening a store down the street from an existing store, but no one can tell me why.
Answer:
You’re probably referring to the “Neighborhood Markets” Wal-Mart Stores Inc. (NYSE: WMT) is building. These stores are smaller and almost exclusively grocery stores, meaning they’re not exactly building Wal-Mart Supercenters next to each other. The company says the minimal distance between a Supercenter and a Neighborhood Market will be no less than one or two miles, which in a densely-populated area, is not all that close.
We don’t necessarily think the strategy is flawed or doomed to fail. While Wal-Mart has struggled for about five or six straight quarters, we do not believe it is a reflection of a poorly operating or broken business model.
Wal-Mart is constructing these smaller format stores in an attempt to take back some of the market share it has lost to dollar stores and other convenience stores. Wal-Mart has pretty much the best supply chain management system and distribution force in the world. It’s how they’ve been pricing out the competition for decades.
Wal-Mart’s primary issue is its customer base, which is largely made of families earning $40,000 or less. Those consumers have not benefited from the broader economic recovery, because they have hardly seen their inflation-adjusted wages grow. In fact they’ve actually fallen 0.2% from June 2013 to June 2014, according to the Labor Department. They likely don’t have a stock portfolio that has soared 30% last year and about 200% in the last five years, as the stock market hits all-time highs.
All-in-all, the company is trading cheaply relative to the market with a P/E of 15.86 versus an average of 17 for the market. Long-term-growth is expected at 8.27%. Additionally, a dividend yield of 2.5% isn’t bad either.
Question:
I work two jobs and I’m able to contribute the max of $17,500 to my 401(k) with my primary employer. The employer matches $0.50 for every dollar up to 4% (total of 2%). I work part-time at my second job, which has a 3% match that I do not contribute to at this time. I make about 10k a year at this second job. Do you think it would be wise to invest in both 401ks, just to take advantage of the free money from the 3% match, as long as I don’t contribute more than $17,500 cumulatively?
Answer:
From a tax perspective and as contributions go, most 401(k) plans are about the same. They generally differ in fees and service. The free money you can get for participating in your part-time job’s 401(k) plan is attractive. We recommend you read your annual disclosure statement and your summary plan description provided by your company to better understand the fees involved in participating in the plan. If both plans are comparable as far as fees are concerned, defer enough into both plans to receive the employer match. Then we recommend putting the remaining contribution into the plan that offers the better investment choices.
Question:
Can I still have a traditional IRA if I contribute to my 401(k) at work?
Answer:
Yes. As long as you have earned income and are younger than 70 ½, you may contribute to an IRA. You can save $5,500 to an IRA in 2014, or $6,500 if you are 50 and older.
However, the real question is whether your contributions will be tax deductible. If you are single and your adjusted gross income is more than $70,000, or if you are married, filing jointly and your AGI is more than $116,000, you cannot deduct your contributions to an IRA. You can still make a contribution. The contribution is a nondeductible contribution that is noted on Form 8606. Nondeductible contributions add to your basis, so when you begin withdrawing money, the nondeductible contributions do not result in taxable income.
The rules get slightly more complicated if you are married and one spouse is covered by a 401(k) but the other is not. The phase-out limit is higher, beginning at an AGI of $181,000. It is completely phased out at $191,000.
For example, let’s consider a married couple with an AGI of $125,000. Because the husband is covered by a 401(k), he cannot make a deductible contribution because the couple’s AGI is above $116,000. However, the wife is not covered by a 401(k), she can make a fully deductible contribution as long as their AGI is below $181,000.
Question:
I hold Dollar General. I’ve heard you talk highly of them in the past. What do you think of their bid to buy Family Dollar? Do you think we’ll see them in a bidding war with Dollar Tree?
Answer:
Two weeks ago, Family Dollar Stores Inc. (NYSE: FDO) received an offer to be acquired by Dollar Tree, Inc. (NASDAQ: DLTR). Dollar General (NYSE: DG) then offered 5% above that of Dollar Tree in a deal expected to add $300 million more in synergies than the Dollar Tree deal. The current CEO of Dollar General, who was widely expected to resign in 2015, has agreed to stay on through the implementation of the FD deal.
We still like this space, as lower income consumers continue to opt for cheaper goods available at discount stores rather than opting to shop at online retailers. This has led to sales growth that is outpacing that of bigger discount retailers like Wal-Mart and Target. Dollar General is also increasing the number of products in the $1 to $5 range, specifically in its private-label brands, such as consumables. Lastly, the company’s recent addition of tobacco offerings should continue to drive sales. Since adding tobacco products, 68% of tobacco transaction included one or more additional items and 41% included three or more items.
Family Dollar rejected Dollar General’s offer citing antitrust concerns; however, there is much speculation the CEO of Family Dollar preferred the Dollar Tree deal purely for personal reasons, as he would likely lose his job in the Dollar General deal, but not in the Dollar Tree deal. The market appears to still believe a deal with Dollar General could get done as the stock is flat following the news, preserving the 10% bump it received on the initial news of a possible deal.
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