Wal-Mart Showing Signs Of Life; Analyst Upgrades

Little To Quibble About

Analyst Wayne Hood said there is little to be critical about the company's 2017 guidance or the first-quarter results, except for the overall expense deleveraged from e-commerce/IT investments. Specifically, the analyst noted same-store sales at its U.S. namesake stores were up 1.4 percent, helped by a 1.5 percent increase in traffic.

The analyst is of the view that the same-store sales performance was helped by LSD growth in grocery and health & wellness, improving same-store sales in general merchandise throughout the quarter, increased contribution from e-com, well-managed broader sequential strategic price rollbacks and a 7-percent drop in same-store sales inventory.

Even as the increased contribution to growth by e-commerce sales suggested sequential deterioration in U.S store sales, BMO Capital Markets believes strategies driving online sales are behind the deterioration, with transactions rising 1.5 percent.

Guidance Achievable In Difficult Period

Given the improved same-store sales throughout the first quarter, the firm believes second-quarter same-store sales growth guidance of 1.5–2 percent and earnings per share guidance of $1–$1.09 are achievable in a difficult period.

Flattish EBIT Margin Likely

The firm believes the company has control over expense growth, resulting in expense leverage as early as the third quarter of 2017. Accordingly, the firm sees potentially moderating erosion or even expansion in EBIT margin rate. However, weighed down by the growth in lower-margin e-commerce and price investments, the firm expects annual EBIT margin rate to remain flattish in the coming year.

Stock Unlikely To Underperform

"We still see many challenges ahead, including emerging competition from hard discounters and an adverse margin mix from growth in e-commerce, but we see a path of better relative sales and transaction growth over the next 12 months that is unlikely to cause the stock to underperform," the firm said.

As such, BMO Capital Markets upgraded shares of Wal-Mart to Market Perform from Underperform and increased its price target to $80 from $78.

At the time of writing, Wal-Mart shares were rising 1.7 percent to $78.86.