NEW YORK — Wal-Mart shares fell 2.2 percent on Thursday after Merrill Lynch downgraded the retailers' stock from "buy" to "neutral," citing sales trends, the pressure of high gas prices and the impact on consumer spending.
In a research note titled, "Bentonville, We Have a Problem," Merrill Lynch analyst Virginia Genereux wrote, "We have two primary concerns. Recent sales trends, both in the form of faltering new door productivity and weak comp-store sales, call into long-term question the rate of sustainable top-line growth in the core Wal-Mart store division in the U.S."
Slower sales growth threatens Bentonville, Ark.-based Wal-Mart's ability to expand operating margins, Genereux said, noting that fatter margins are needed for improvement in return on invested capital. Equally troubling, the analyst said, are the macroeconomic trends affecting lower-income consumers, including rising energy prices, increased non-discretionary spending commitments and middling job and wage growth. Wal-Mart's comps are more highly correlated with gas prices than those of any other retailer.
"We continue to believe that efforts to revitalize the U.S. stores, through better merchandise, store layout and customer experience will, at some point, bear fruit," Genereux wrote. "But this is a difficult environment in which to execute those changes, and earnings could face more pressure in the intermediate term. And as we are seeing with many hardlines retailers, a reasonable valuation based on even reduced estimates provides little in the way of stock price support."
Wal-Mart officials declined to comment. However, a spokeswoman pointed to a rebuttal from Buckingham Research in which analyst Daniel Binder wrote, "New store productivity may have slipped a bit in June, but it isn't falling off a cliff and we have seen some modest fluctuation in the past only to see it rebound. Further, if a period of slower new store productivity is setting in, it should actually push management closer to cutting square footage growth, which will be interpreted as a positive. Lower store cannibalization should translate into better new store productivity and we think square footage cuts could come as early as next year."
Buckingham also downplayed the idea of gross margin erosion in light of the increase in global sourcing and the expenses that Wal-Mart still hopes to trim in the U.S.The retailer's stock "is a good buy again recognizing that we still may be a little early," according to Buckingham.
Wal-Mart shares closed at $44.16 on Thursday, down 99 cents, in New York Stock Exchange trading. A total of 26.3 million shares were traded compared with average volume of 11.9 million.
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