Wall Street, investors divided on Wal-Mart’s lowered earnings outlook

The investment community is going with its own every day low price on Wal-Mart shares as the retailer looks inward to try and fix ongoing challenges in its flagship Walmart U.S. division. 

Shares of Wal-Mart Stores (NYSE: WMT) plunged again Thursday (Oct. 15) below the $60 level to $58.98 in heavy trading as downgrades from several brokerage houses began to hit the newswires. In late afternoon trading, the price fell to around $59.30 in volume that was more than four times the average.

During the past month, Wal-Mart share prices have fallen 22%, and half of that decline has come in the past two days as the retailer forecast weaker 2017 earnings somewhere between 6% to 10% lower thanks to $1.5 billion investments in higher wages, more store employees and supply chain improvements.

Other than the lower earnings forecast, the bears and bulls of Wall Street have different opinions on what the changes and internal investments mean for the future financial performance of Wal-Mart Stores Inc.

BULLS STAND PAT
Budd Bugatch, an analyst with Raymond James & Associates who has a long history watching the retail sector, believes the retailer’s inward focus on its U.S. business operations, revamping of the management structure, asking more from suppliers and raising worker pay are all positive moves by Wal-Mart management.

Bugatch still rates the retailer a “strong buy” despite the lower earnings outlook for next year.

“We remain convinced that Walmart’s new, young leadership is focused on the correct U.S. strategy: (1) fix the customer experience in the stores, (2) make eCommerce/store shopping seamless, (3) better the fresh/deli food presentation, and (4) judiciously expand the small store Neighborhood Market format,” Bugatch wrote in a Thursday note to investors.

He said the bad news of the incremental expense related to raising hourly wages first announced in February was not priced into the stock even though many thought it has been. Bugatch admitted that he and other analysts did not accurately factor in the incremental wage hike which will take effect in February. He said Wal-Mart stepped outside their normal comfort zone and gave some longer guidance information at the recent investor meeting in New York. He said the retailer made no alterations to its current year forecast  and still expects to generate 3.5% overall better sales this year and next.

“We are steadfast in our belief that the actions will grow sales and keep Walmart relevant. Meanwhile, investors will receive an above-market dividend yield,” Bugatch noted.

Wal-Mart did announce plans to repurchase $20 billion of its own stock over the next two years which is an added bonus to shareholders who stay put. The company also almost guaranteed that its dividend will increase again this year.

HOLDING ON
Cowen analyst Oliver Chen held his “hold” rating on Wal-Mart Stores but he lowered his price target to $66 from $77 after the recent announcement.

"Changes ahead to benefit the customer; but, at the expense of shareholder earnings.” Chen said. “To compete for share in the modern retail environment, Walmart must offer improved customer service, a seamless shopping experience, a sharply price assortment, plus fast delivery … paying for all this will come out of earnings.”

Stephens Inc., Bank of America and Credit Suisse all downgraded Wal-Mart shares to a “hold” position from previous “buy” recommendations citing the lower expected earnings potential next year. Moody’s analyst Charles O’Shea said the lower guidance was not a surprise to his firm. He said looking at Wal-Mart through a longer-term lens Moody’s thinks the strategies outlined by Wal-Mart management are the right steps it needs to take for the long haul. He said all brick and mortar retailer need to consider such changes.

“That have to invest in their people, lower, competitive prices and e-commerce if they are going to compete with Amazon,” he said. “When you try to move multi-channel, it’s not free and it does not happen overnight. To compete with Amazon … they have to do make these investments. It’s not bad for the long-term, but if you are in the stock for the short term it’s a problem.”

He also applauded Wal-Mart’s focus on pricing and maintaining competitive pricing advantage which will require more company investment beginning in fiscal 2018. 

Steve Odland, a CNBC contributor, said Wal-Mart has no choice but to invest in e-commerce capabilities. He said Wal-Mart is the poster child for market saturation. For years the growth was produced by making the stores bigger and bigger and adding more stores, but Odland said the retail behemoth hit a wall. He said Wal-Mart has to make the big investments in e-commerce and marry that with their physical stores and distribution centers.

“This year Wal-Mart predicts relatively flat sales and Amazon is growing at 77%. That story tells it all,” Odland added.