Buckingham: Wal-Mart Merely A Neutral, Labor Investment Uncertain

Buckingham Research Group’s John Zolidis initiated coverage of Wal-Mart Stores, Inc. WMT with a Neutral rating and a price target of $70, saying that the company’s planned investments would hurt earnings in the near term.

Labor Investment

Wal-Mart plans to invest $2.7B in offering higher wages over a multi-year period. The company believes this would help it to achieve higher quality, better execution and elevate customer experience, with all these ultimately driving sales.

While saying that Wal-Mart’s vision was worthy of an applaud, and should result in better sales, analyst John Zolidis commented that the move would exert pressure on the company’s near-term earnings and returns. He added that there was uncertainty around the “magnitude and timing” of any potential sales gain.

Ecommerce Investment

Wal-Mart also has plans to investment in ecommerce. “We support this investment from a strategic standpoint but believe operating losses until at least FY18 (we estimate $600M-$800M ($0.14-$0.16 per share) in FY16) hurt prospects for the equity,” Zolidis wrote.

This, along with pressure from international markets, is expected to impact the company’s earnings, returns and cash flow for the foreseeable future, analyst John Zolidis commented.

International Markets Challenged

Overall international sales contributed $123B, or 26 percent of Wal-Mart’s total FY15 sales. Among the 5 largest international markets of the company, Brazil, China and the UK are “reporting negative comps or profit declines due to economic or competitive conditions,” the analyst mentioned.

Wal-Mart’s shares are currently trading at a modest premium to historical averages. Zolidis believes this is “unjustified.”