Walmart may have been deemed a retail winner during the COVID-19 pandemic, but the retail giant still faces operational challenges, according to R5 Capital analyst Scott Muskin, who last week downgraded the stock to a sell position and lowered the target price to $131 from $157.
Muskin said in a note to investors his downgrade came on the heels of visits to 40 Supercenters in multiple states. He cited “significant operational difficulties” in certain regions noting four long-term fundamental problems Walmart must fix to continue growing.
He cited overall store execution and customer experience as challenging in part because of out-of-stocks and fresh standards that are not uniformly applied across the retailer’s around 5,500 stores. He said out-of-stocks, overstocks and under-stocks from supply challenges also persist in many stores and this could pressure earnings in the near term. Muskin also said Walmart will need to make more capital investment to improve its omnichannel business.
“Solving these issues could pressure earnings, through higher expenses and reduced gross margins, as well as fewer share repurchases,” Muskin noted.
Of the 32 analysts who follow Walmart shares, those who were the most bullish on share performance in December declined from 12 to 8. The number of analysts rating shares a “buy” are also down from 15 to 7 from December to January. There were 15 analysts who were more neutral or bearish on the shares in January, up from 6 in December, according to Yahoo! Finance.
The stock has been on a downward pattern since touching its all-time high of $153.66 on Dec. 1. Shares of Walmart (NYSE: WMT) closed Monday (Jan. 25) at $146.22, down 11 cents. During the past 52 weeks, shares have traded between $102 and $153.66.
Walmart CEO Doug McMillon recently said the one problem he would like to fix is out-of-stocks. Some of the problems he said come from Walmart having a lean inventory of products based on sales before the pandemic. He said unpredicted demand the pandemic brought on meant Walmart sold through its stocks of some products in stores and distribution centers and supplier’s warehouses. He said Walmart has worked with suppliers to get products back in stock, but some of them will take more time than others.
While Walmart does have operational challenges, several analysts remain bullish on the stock despite the fact it is trading at the highest price-to-earnings ratio in nearly two decades. Costco is the only retailer deemed more “expensive” than Walmart based on PE ratios, according to Muskin.
Jefferies analyst Stephanie Wissink recently reiterated a “Buy” rating on Walmart shares with a $177 price target. She noted 2021 could be a transformational year for retail. Stephens Inc. analyst Ben Bienvenu also remains bullish on Walmart shares with an overweight rating and a price target of $170. He noted Walmart had strong momentum heading into the holiday season and has the strength to begin delivering strong shareholder returns through effective margin leverage in 2021.
RBC analysts said last month Walmart is well-positioned to perform well in a more challenging environment, as well as a recovering post-vaccine scenario.
Walmart will report its fourth-quarter and full-year earnings on Feb. 18 and will address the investment community via a virtual meeting the same day.