Wal-Mart Faces 'Short-Term Pain,' Warns Jefferies Analyst

• Analysts at Jefferies looked into Wal-Mart Stores, Inc. WMT short- and longer-term prospects.
• They agree with management’s decisions for the long term, but see shares range-bound in the shorter term. They reiterated a Hold rating and trimmed their price target from $71 to $58.
• Shares of Wal-Mart were down more than 2 percent on Thursday.

In a report issued Wednesday, Jefferies analysts led by Daniel Binder share some thoughts regarding Wal-Mart’s prospects. The analysts were not expecting a "great EPS outlook" for fiscal 2017 due to increased expenses. However, the anticipated EBIT margin contraction is larger than initially envisioned.

The analysts assure that, while it is "hard to disagree with the actions management is taking and investors could ultimately be rewarded for the tough decisions being made today," in the short term, more elevated expenses and lower earnings, free cash flow and return on investment should keep shares range-bound at new lower levels.

The report points out four key points to this thesis:

1) The investments made on e-commerce and labor continue to negatively impact on results. The firm is expecting this impact to reach its peak on fiscal 2017.

2) Management plans to start to shift its focus back from store experience to price investment next year, and continue to accelerate this investment into fiscal 2018 and 2019. "Broadly, retail stocks reacted negatively to this news today [Wednesday], but we have heard this before and sometimes WMT’s bark has proven worse than its bite," the analysts said.

3) Investment in e-commerce continues, and should drive growth going forward.

4) Capex is being reduced while new share repurchase plans are being implemented.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.