AP News

Wal-Mart's shares slip on analyst downgrade


NEW YORK (AP) — Shares of Wal-Mart slipped 2 percent in early trading Monday and J.P. Morgan downgraded its stock, voicing concern that growing economic pressures will weigh on its momentum.

THE SPARK: Analyst Christopher Horvers lowered his rating to "Neutral" from "Outperform" and expects Wal-Mart's stock will trade at $75 in the next 12 months, down from his estimated target price of $84.

Horvers believes sales at the world's largest retailer have peaked after three years of strong growth. The company, based in Bentonville, Ark., fixed mistakes in merchandising and pricing, but he thinks that the "low hanging fruit" is now in the company's past.

Wal-Mart's business will be strained by a hike in payroll taxes, which will squeeze lower-income consumers, Horvers said.

THE BIG PICTURE: Wal-Mart benefited during the recession as wealthier shoppers traded down to low-priced stores and existing customers stayed even closer to home. But soon after the recession ended in June 2009, Wal-Mart grappled with a sales slump that lasted a little more than two years, in part because of the mistakes in pricing and merchandising.

In the third quarter of 2011, Wal-Mart had begun to turn that situation around after restocking 10,000 products and focusing more strongly on prices. It slashed expenses and passed some of the savings on to hard-pressed customers.

The company has now notched five consecutive quarters of revenue growth at comparable stores in the U.S., a clear-cut departure from the nine straight quarters in which revenue at those stores declined.

When the company posts fourth-quarter earnings on Feb. 21, most expect even more positive results from aggressive discounting and an expanded layaway programs.

For lower-income shoppers, however, a slow economic recovery has affected day-to-day budget decisions more than it has for those with more disposable income. The company has seen some of its momentum slow.

The Labor Department on Friday said that the job picture continues to improve, but the unemployment rate actually rose, from 7.8 percent, to 7.9 percent, in January.

And while the company posted a 1.5 percent bump in revenue at comparable stores during the most recent quarter, that was less than the 1.8 percent that Wall Street was looking for, according to a poll of analysts by Thomson Reuters. And it was well below the 2.2 percent gain in the second quarter and the 2.6 percent gain in the first.

Horvers is now concerned about the impact of a new 2 percent payroll tax increase on core customers. He estimates that the average income for a Wal-Mart customer is $42,500, which would equate to $70 per month less in in take-home pay.

"Given lower discretionary spending dollars in this income class, the impact is likely to be larger," he wrote. And Wal-Mart is unlikely to see shoppers trading down as they did in 2008 and 2009, when the financial crisis drove higher-income customers through its doors.

"It's just not that dramatic and we expect existing customers to cut spending in the discretionary areas of the store this time around," Horvers wrote.

In February 2009, 18 percent of Wal-Mart's U.S. traffic growth came from new customers, Horvers wrote. "Once the world stabilized, this proved fleeting," he said.

SHARE ACTION: Wal-Mart Stores Inc. fell nearly to 2 percent or $1.21 to $69.28. Shares have been trading between $57.18 and $77.60 over the past 52 weeks.


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