Wal-Mart's Flattish Earnings Growth May Be Here To Stay

While Wal-Mart Stores, Inc’s WMT store and ecommerce enhancements are gaining momentum, the company would likely continue to generate flattish EPS growth due to elevated investments, Morgan Stanley’s Simeon Gutman said in a report

He maintained an Equal-weight rating on the company, while reducing the price target from $76 to $74.

At its Investment Community Meeting, Wal-Mart “delivered the most cohesive strategic message in years,” Gutman commented. Management seems to be initiating the right moves for the business and the company is evolving rapidly, “with better service, cleaner stores, higher in-stocks, deeper value, more unique items and a differentiated e-commerce platform in Jet.”

Related Link: Wal-Mart Reaffirms 2017 Outlook, Sees Little Growth To 2018

Transformation Costlier, Taking Longer Than Expected

While Wal-Mart’s top line growth is now the healthiest it has been since 2010, Gutman pointed out that “repositioning the largest retailer in a hyper competitive market is a massive undertaking” and that companies tend to “underestimate the cost of adapting.” He added that omni-channel transformations are typically costlier and take longer than most retailers anticipate.

Take On Prospects

EBIT and gross margins are expected to contract into F2018. The market seems to be underappreciating the difficult gross margin comps “WMT faces next year as it laps vendor negotiation benefits and modest deflation tailwinds,” the analyst commented.

Although downside to Wal-Mart’s shares is limited by the company’s revenue momentum and “safe haven status” against a volatile consumer and retailer backdrop, expectations of flattish EPS makes the stock less compelling, Gutman said.

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