Credit Suisse Cuts Wal-Mart To Neutral Following 'The Great Reset'

• Wal-Mart Stores, Inc. WMT shares have plummeted 31 percent year-to-date, and are trading at their 52-week lows of around $60.
• Credit Suisse’s Michael Exstein downgraded the rating on the company from Outperform to Neutral, while reducing the price target from $85 to $62.
• The challenges being faced by Wal-Mart are understood, Exstein said, while adding that having a sales growth mandate may take precedence over profitability and asset redeployment.

Analyst Michael Exstein said that Wal-Mart tried to “reset” expectations during its latest meeting with the financial community. He explained that the company faces several challenges including “a need to invest in e-commerce, store standards in the US and pricing.”

Moreover, Wal-Mart is in the midst of changing its international strategy. All these challenges have now “been fully acknowledged,” Exstein mentioned, while adding that the company’s profitability and asset redeployment would “take a backseat to investment and a sales growth mandate.”

In the report Credit Suisse noted, “We were clearly too optimistic on the company's ability to embrace an aggressive capital allocation strategy.”

Wal-Mart has not fully embraced what had earlier been expected, including divesting its underperforming international assets, a spin-off of Sam's Club, and reduced capital spending, resulting in significant return of cash to shareholders.

Although Wal-Mart has announced a two-year share repurchase authorization worth $20 billion, Exstein commented that these initiatives are unlikely to “go nearly far enough in terms of capital allocation as a reason to buy these shares.”

While Wal-Mart’s decision to focus on its US performance and on e-commerce is “the right thing to do” as a long-term strategy, “the leveraging point for investments appears to be 3 years away - assuming a best case scenario in terms of sales growth and market share gains,” Exstein wrote.