Analyzing Walmart’s Recent Stock Plunge

Walmart Store
A Walmart store in Miami.
Getty Images.

It’s been a tough week for Wal-Mart Stores Inc., which inevitably means a tough week for retail and the U.S. economy overall, experts say.

The mega-chain’s shares plunged to a 52-week low, to $58.37, on Thursday — a stark contrast from its high of $90.97 in late January — following yet another profit warning from the company on Wednesday.

Insiders say the firm’s downward-adjusted forecasts could have a ripple effect on the rest of the economy since it draws new attention to the wage debate. If the country’s largest private employer — and its biggest by revenues — can’t afford to increase wages, who can?

The firm’s EVP and CFO, Charles Holley — who announced his retirement this week — said FY17 will represent the firm’s “heaviest investment period.”

“Operating income is expected to be impacted by approximately $1.5 billion from the second phase of our previously announced investments in wages and training as well as our commitment to further developing a seamless customer experience,” said Holley.  “As a result of these investments, we expect earnings per share to decline between 6 percent and 12 percent in fiscal year 2017. However, by fiscal year 2019, we would expect earnings per share to increase by approximately 5 percent to 10 percent compared with the prior year.”

Walmart said it expects to invest $1.1 billion in e-commerce, and many market watchers took that as a sign the firm was feeling pressured by the growing success of e-tail behemoth Amazon.

Cowen & Co. analyst Oliver Chen, in an Oct. 15 note, said the changes the firm will undergo are necessary in order to compete in a “modern retail environment.”

“Despite the rising threat of Amazon, other e-com pure plays and a reinvigorated [Target Corp.], Walmart believes it has the competitive assets to gain market share in the next three years at a [compound annual growth rate] of 3 percent to 4 percent (adding an incremental $45 billion to 60 billion in sales),” Chen explained. “Walmart must offer improved customer service, a seamless shopping experience, a sharply priced assortment, plus fast shipping; put simply, paying for this yields EPS deleverage.”

Despite the massive stock selloff, Nomura Securities International Inc. analyst Robert Drbul shared Chen’s optimistic view of the firm.

“We believe Walmart is doing the right thing for the business, and these investments should likely pay off,” Drbul wrote.