BJ - What analysts are saying about Walmart's pared profit forecast

Walmart’s ( NYSE: WMT ) surprising preannouncement that slashed profit forecasts for the full year prompted a wide array of reaction Tuesday from analysts, whose views ranged from pessimistic to upbeat.

Shares of the Arkansas-based retail giant reeled in Tuesday’s trading, falling nearly 10% at the intraday nadir as the market processed a pessimistic outlook the company issued Monday .

Yet despite the negative action for the name, Wall Street emerged a thoroughfare divided on the stock.

Top analysts on the Street expressed a wide range of views on WMT's future. Some predict further deterioration ahead as inventory and margin issues persist. But others see opportunity amid a “clearing event” for the stock.

Forecast Fears Realized

In the former camp, many analysts indicated they were caught off-guard by the degree to which inventory and trade-down concerns hit Walmart ( WMT ).

“WMT confirmed investor's biggest fear after the Q1 guide down; it didn't cut deep enough to reflect the risk associated with its excess inventory position and a slowing consumer,” Wells Fargo analyst Edward Kelly told clients in a note Tuesday. “WMT's news suggests the retail backdrop has continued to soften.”

The inventory issues also evoke concerns on the retailer’s product mix in addition to pricing issues, Kelly advised. As inflation continues to hamper consumers and escalate recession fears, the need to markdown elevated inventory levels come at an inopportune time. Indeed, Walmart’s ( WMT ) key consumer demographic, low to middle-income consumers, is among the hardest hit by inflation.

As such, Kelly cut his target price on the stock to $130 from $150 prior to the announcement.

Truist analyst Scott Ciccarelli echoed many of these concerns, telling clients in a research note that "we believe that growing economic pressures on low/middle income consumers are having an even bigger adverse impact than we previously anticipated. As we have previously highlighted, inflation on commodities like food and gas act as a flat tax and have an outsized impact on moderate earners.”

Ciccarelli reiterated his “Hold” rating on shares and cut his price target from $139 to $117 on the back of the company's downbeat forecast. He sees retailers with strong pricing power - such as Home Depot ( HD ), Lowe’s ( LOW ), Tractor Supply ( TSCO ) and selected auto-parts retailers - as preferable to the behemoth from Bentonville.

A Clearing Event?

Still, there remains some optimism that Monday's pre-announcement from Walmart ( WMT ) could get the bad news out of the way, laying a path for the stock to rebound in coming weeks and months.

“We anticipate WMT shares underperform by less than the anticipated 2023 EPS revision and see more upside than downside from [current] trading levels,” Stifel analyst Mark Astrachan wrote Tuesday.

While he advised that the company might need time to work through excess inventory, Astrachan said his firm’s channel checks suggests lower-income consumers are recovering into the close of the summer as gas prices come down.

As such, the analyst expects markdowns to peak in WMT's fiscal second quarter and provide upside for shares for fiscal 2023 as a whole.

Morgan Stanley likewise sees a better risk/reward for Walmart ( WMT ) following Monday's preannouncement. The firm reiterated its “Overweight” rating on the stock and advised that a “trough may be near” - even if shares tread water in the immediate term.

Will Other Retailers Cut Guidance?

Still, Morgan Stanley’s Simeon Gutman is more optimistic about the buying opportunities presented by Walmart’s peers. He believes dollar stores and wholesale clubs offer investors significant opportunity at present.

“When [Walmart and Target ( TGT )] reported dual misses/guide downs in May, the broader retail selloff appeared fairly indiscriminate and impacted even highly defensive subsectors,” Gutman wrote on Tuesday. “We thought these two subsectors in particular, i.e. Dollar General ( DG ), Dollar Tree ( DLTR ) Costco ( COST ) and BJ’s Wholesale Club ( BJ ) screened attractively in the aftermath, and they subsequently rallied over the next few weeks on largely better-than-feared results.”

By contrast, Gutman indicated Walmart's growing market share in grocery amid a consumer trade-down could bode poorly for its key competitors in this market. Significant grocery competitors such as Amazon ( AMZN ), Albertsons ( ACI ), and Kroger ( KR ) could all be impacted by this dynamic.

Meanwhile, Wells Fargo argued that Target ( TGT ) - which cut guidance in June - is being unduly dragged into Walmart’s declines.

“We are not convinced [Target ( TGT )] will cut again when it reports Q2 given what it has done to date,” Wells Fargo's Edward Kelly wrote in his report, noting that TGT likely cut its guidance enough already and would not need to be revisited as Walmart's has been.

Instead, he told clients Five Below ( FIVE ) and Ollie’s Bargain Outlets ( OLLI ) should be viewed with more caution than Target.

“WMT's news only confirms that FIVE likely needs to cut guidance again, an event necessary for the stock to work in our view. It also says we should not get too carried away with the outlook for OLLI's comps this quarter (in line feels right to us), but we remain positive on this close-out name as its buying opportunity should improve in the coming months just as comparisons ease and trade down accelerates.”

Read more on the pre-announcement's impact across the retail space .

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