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Walmart Reiterated at Neutral

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We maintain our Neutral recommendation on Wal-Mart Stores, Inc. (WMT - Free Report) . Walmart’s fiscal second quarter 2014 results failed to impress us, but we have faith in the company’s long term fundamentals.

Why the Reiteration?

On Aug 15, Walmart posted its second quarter results. The retail giant met the Zacks Consensus Estimate for earnings but missed the same for revenues due to a gloomy consumer spending environment globally. Moreover, the company slashed both its revenue and earnings expectations for fiscal year 2014.

Walmart’s fiscal second quarter 2014 earnings of $1.25 per share increased 5.9% year over year and were within the company’s guidance range of $1.22 and $1.27 per share. Total revenue of the world’s largest retailer climbed 2.3% year over year but missed the Zacks Consensus Estimate by 1.8%.

A challenging retail environment in the U.S. as well as in most international markets due to cautious consumer spending hurt the top line in the quarter. Weak consumer spending during the quarter was primarily caused by payroll tax increase. Payroll taxes in the U.S. increased 2% since Jan 2013, which hurt lower- and middle-income segment consumers. In addition, lower-than-expected price inflation of grocery items led to a disappointing quarter.

For fiscal 2014, Walmart has sharply lowered its net sales growth guidance from a range of 5%-6% to a range of 2%-3% due to weaker than expected performance in the first half. Moreover, the challenging sales environment as well as currency headwinds are expected to hurt the second half sales as well. Walmart also lowered its earnings expectations from a range of $5.20-$5.40 to $5.10-$5.30 per share for fiscal 2014.

Despite the short-term concerns, we are impressed with the company’s initiatives to reduce operating expenses. The company’s size and scale of operations also makes it appealing. The company’s significant exposure in the international markets makes it the largest retailer in the world.

In addition, the company has been expanding its e-commerce business. However, gloomy consumer spending going ahead, currency headwinds, inventory concerns and continued economic pressure keep us on the sidelines. Walmart holds a Zacks Rank #4 (Sell).

Retailers that are presently doing favorable business include Spartan Stores Inc (SPTN - Free Report) , Whole Foods Market Inc. and Safeway, Inc. , all of them carrying a Zacks Rank #2 (Buy).

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