Analysts like the direction Walmart is headed

Walmart scored well with Wall Street analysts this week, hosting them in Bentonville for the company’s annual investor conference, a tradition that dates back to the early 1970’s after the company went public.

While the song and dance routine has changed a bit since the early days of float trips on the Elm River, Walmart did wine and dine the group and took questions in a half-day conference on Tuesday with time to visit stores and check-out some of the investments being made.

Walmart wasted no time getting down to business as it made two announcements ahead of Tuesday’s conference start. The biggest of those was an updated earnings guidance that factors in $16 billion Flipkart impact not previously included.

Stephens Inc. Analyst Ben Bienvenue remains bullish on Walmart having reiterated his $115 target price following the retail giant’s lower guidance for 2019 and 2020. Bienvenue said Walmart’s updated guidance for this year ($4.65 to $4.80 per share) is in line with his expectations.

“Additionally, we believe the fiscal year 2020 select guidance is better than expected and demonstrates a continuation of strong core business trends. We continue to believe the company’s investments are driving sustained improvements in the business and that Walmart is well positioned to outperform over the intermediate-term,” Bienvenue noted.

Goldman Sachs analyst Matthew Fassler noted the new guidance by Walmart reflects a competitive edge. Historically, he said, assortment and price largely “have faded relative to purveyors of extreme value (warehouse clubs, hard discounter) or extreme convenience (dollar stores), as e-commerce has neutralized the impact of selection.”

Walmart execs continue to tout the lighter in-store inventory levels and said they will be competitive on price taking markdowns as needed in local markets to compete with Aldi and others. Walmart has said the price markdowns will be strategic and thoughtful, not just blanket rollbacks.

Analysts continue to have some concern over declining margins, despite steady same-store sales and revenue growth projections of 3%.

“While the top line outlook for 2019 looks healthy and was generally in-line with expectations, the margin view for next year did come in softer than expected,” Gordon Haskett analyst Chuck Grom said.

Walmart execs were somewhat hesitant give margin projections for next year, but say they expect margin compression through the end of this year. That said, Brett Biggs, chief financial officer at Walmart, told analysts there are many levers the retailer can pull to help offset some of the margin compression. He also said tight freight capacity will continue to increase transportation costs for Walmart into next year.

Biggs said Walmart has assembled a new team dedicated to trimming expenses and operational costs across the entire business. He said making small changes at Walmart can yield big savings citing the change out of light bulbs in stores and parking lots to more energy efficient options will save the retailer $200 million over time. He said changing the floor wax and using a robotic cleaner for the duty will save $20 million annually.

Budd Bugatch, an analyst with Raymond James & Associates, is also bullish on Walmart expecting the company to outperform in the coming months. He said the scale back on new stores and continued investment in remodels and technology to reduce store overhead seem to be working well for the retail giant.

Charles O’Shea, an analyst with Moody’s, agreed Walmart is doing largely what Wall Street has been expecting the past few years.

“They are going to keep investing and the capital expenditures are flattening so that’s a positive for earnings. The investments will continue to be tactical and that’s something the company has demonstrated it’s very effective at doing since 2015 when they announced they were going down this path,” O’Shea said.

While O’Shea is a fixed-income analyst, he said in his opinion Walmart is undervalued compared to other retailers. He said Walmart’s balance sheet has room for additional investment even though Flipkart chewed into that cushion.

Karen Short, an analyst with Barclays, also thinks Walmart is undervalued. She has a $110 target price.

“We believe that Walmart will be able to sustain comp gains over peers going forward,” Short said in a recent note to clients. “We believe this is a function of a stronger assortment, improved quality of fresh products, wage increases and goals for stores to be ‘clean, fast, and friendly.”

She said Walmart has regained momentum citing 15 consecutive quarters of positive traffic growth and she sees further room for the retailer’s investments to drive comp sales higher.

Walmart shares (NYSE: WMT) closed Wednesday (Oct. 17) at $95.56, up 75 cents on the day. For the past 52-weeks the share price has ranged between $81.78 and $109.98.