BMO Capital Maintains Underperform Rating On Wal-Mart Stores

The world's biggest retailer reported adjusted EPS of $1.07, which exceeded the Street estimates by $0.05 a share and BMO estimates by $0.07. Wal-Mart's revenue grew 0.5 percent to $120.9 billion and topped the analysts' expectations of $120.16 billion. Its comp sales rose 1.6 percent.

Guidance And Analyst Take

"The year-to-date improvement in GM rate has been the single biggest surprise in 2016 as we expected price investments to lead to pressure," analyst Wayne Hood wrote in a note.

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However, Hood said although e-commerce and GMV sales grew 11.8 percent and 13 percent, respectively, most e-commerce retailers are posting similar, if not higher, sales growth. Wal-Mart is actually below the average with total U.S. e-commerce sales growing at 15.8 percent year-over-year in the second quarter according to the U.S. Census Bureau.

"We are concerned that, in an effort to catch up in the e-commerce game, Walmart may jeopardize its margins and not get the corresponding return it expects," Hood highlighted.

Hood also expressed his concerns that the $3.3 billion Jet.com acquisition is on top of Wal-Mart's plans to invest $1.2 billion–$1.5 billion in e-commerce in 2016.

Further, the analyst said Marc Lore, Jet.com founder and CEO, who will join Wal-Mart and run both Jet.com and Walmart.com, has limited experience running a business long term.

"We have concern about Marc Lore's ability to run a company and also that he will move on sooner rather than later given his track record," Hood noted.

Justification

Hood's Underperform rating is based on the thesis that further large increases in gross margins could lessen as price investments accelerate into 2017, despite the company's steps to restore traffic, grow SSS and reduce inventory point to success.

"Importantly, at 17x 2016 EPS, expectations are high for a company with a LSD long-term EPS growth rate, leaving us at Underperform," Hood added.

At time of writing, shares of Wal-Mart were down 0.33 percent to $72.51. Hood raised his price target to $67 from $60.

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