'It's Tough To Get Constructive' On Wal-Mart, Analyst Warns

• Wal-Mart Stores, Inc. WMT shares have appreciated 13.88 percent over the past three months, from $57.87 on November 16.
• Charles Grom of Sterne Agee CRT has maintained an Neutral rating on the company, while raising the price target from $57 to $58.
• The steps being taken by the company would take years to bear fruit, and Grom noted that it was difficult to get constructive on the stock given the deflationary headwind expected in 2016.

Analyst Charles Grom expressed optimism regarding the measures being undertaken by CEO Doug McMillon, such as resetting the margin profile while the company deals with issues on different fronts and terminating concept that have not been working.

Grom also believes that “lowering its ‘16 guide in Oct. was wise, in our view, thereby “taking the risk” out of the numbers – a strategy that we hope most retailers take in the coming weeks.”

In terms of the 4Q performance, Grom pointed out that with 56 percent of Wal-Mart’s revenue coming from grocery sales and given the negative Food CPI trends during the quarter, it would be unlikely for the company to report any significant upside to its 4Q comp guidance, despite seeing favorable traffic trends.

In fact, the analyst estimates that Wal-Mart U.S. would see 1.9 percent growth, with 0.8 percent growth at Sam’s Club and 7 percent decline in International, which would lead to a total revenue decline of 0.7 percent for 4Q.

“With SG&A headwinds persisting and deflationary pricing trends in food starting to pressure the top-line we see no reason to believe management will alter its 2016 expectations for a 6-12 percent drop in EPS that the company outlined during its October Analyst Day,” the Sterne Agee CRT report added.