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Wal-Mart's Crashing Because It Over-Earned (Here's How To Play The Dip)

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Wal-Mart's Crashing Because It Over-Earned Here's How To Play The Dip
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  • Shares of Wal-Mart Stores, Inc. (NYSE: WMT) plummeted more than 9 percent Wednesday morning.
  • Wal-Mart said it expects 2017 earnings per share to decline between six and 12 percent in fiscal 2017 and beyond.
  • Wal-Street's top retail analysts were mixed following the announcement.

Shares of Wal-Mart plummeted on Wednesday after the company offered a detailed look into fiscal 2017.

Wal-Mart's management stated in its press release (ahead of its annual Investor Day event) that fiscal 2017 will represents its "heaviest investment period" in history. Accordingly, the company expects to see a decline of six to 12 percent in its full year fiscal 2017 earnings per share which is expected to recover and increase by five to 10 percent only in fiscal 2019.

"Our investments in our people, our stores and our digital capabilities and e-commerce business are the right ones," Doug McMillon, President and CEO of Wal-Mart said in the press release. "We will be the first to build a seamless customer experience at scale to save our customers not only money but also time."

Wal-Mart also communicated the following: 1) total net sales in fiscal 2016 will be flat compared to fiscal year 2015), 2) sales are expected to grow three to four percent annually over the next three years, 3) a new $20 billion share repurchase program has been authorized that is expected to be utilized over the next two years.

Shares of Wal-Mart traded as low as $60.12 Wednesday morning. The last time the issue traded near the $60 per share mark was back in May 2012.

Wal-Mart's stock is now down nearly 30 percent year-to-date and gained only 12 percent over the past five years. By comparison, the ETF that tracks the Dow Jones Industrial Average, SPDR Dow Jones Industrial Average ETF (NYSE: DIA), is lower by just under five percent year to date but higher by more than 54 percent over the past five years.

Stifel: Here's The Real Story

David Schick of Stifel attended Wal-Mart's analyst meeting and commented in a note that investors may be looking at Wal-Mart's guidance in the wrong way. The analyst noted that while the headlines may suggest the company is entering a "reinvestment period" – the "underlying narrative" may be overlooked.

Schick continued that Wal-Mart has "substantially over-earned" over the past years as management made reference to wages and price investments.

Moreover, the company admits that it is competing against lower cost retailers while it may be overlooking opportunities in targeting the higher-income consumers.

"The basic case for over-earning is so clear to us that investors must move out their expectations for opportunities for and timing future operating profit growth," Schick wrote. "What's clear is Wal-Mart embracing digital investments to become more and more seamless in omni-channel; this is the right things to do for the very long term, in our view, but again it contributes to lower operating profit dollar confidence for the next few years."

Schick maintained a Hold rating with no assigned price target on Wal-Mart's stock

Sozzi's Thoughts

Brian Sozzi, a notable retailer analyst, offered a similar view.

Speaking to Benzinga, he suggested that Wal-Mart has for years underpaid its workers and "neglected" its online business. By doing so, the company made its profits look better, or in other words, the company "over-earned." Now the firm is playing catch up.

Sterne Agee CRT: Buy Retailer Stocks, Not Wal-Mart

Charles Grom of Sterne Agee CRT also commented on Wal-Mart's guidance. Of note, the analyst pointed out that Wal-Mart's roughly $20 billion commitment towards buybacks in the next two years implies "significant" margin contraction at a time when the company is expecting "modest" sales growth.

Grom continued that Wal-Mart's announcement has affected the entire retail space as many stocks are seeing red. However, the analyst argued that Wal-Mart's guidance is "more company specific than it is related to overall macro conditions." Accordingly, he suggested that investors use the "intra-day weakness across the board" to accumulate positions in Buy-rated names including Costco Wholesale Corporation (NASDAQ: COST), Dollar General Corp. (NYSE: DG), and Dollar Tree, Inc. (NASDAQ: DLTR)

Grom maintained a Hold rating and $63 price target on shares of Wal-Mart.

Latest Ratings for COST

DateFirmActionFromTo
Feb 2017SusquehannaInitiates Coverage OnPositive
Feb 2017BernsteinInitiates Coverage OnMarket Perform
Jan 2017Stifel NicolausInitiates Coverage OnBuy

View More Analyst Ratings for COST
View the Latest Analyst Ratings

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