Why Wal-Mart Stores, Inc. (WMT) Was Downgraded by Jefferies Group?


Jefferies Group slashed their target price on Wal-Mart Stores, Inc. (NYSE:WMT) from $89.00 to $76.00 in a report released Monday, while maintaining their ‘Hold’ rating on the stock, which began the day’s trading at $74.67.

In an interview with CNBC to discuss some of the reasoning behind the price target reduction on Wal-Mart Stores, Inc. (NYSE:WMT), Jefferies Group managing director and senior research analyst Daniel Binder mentioned some of the woes plaguing not only Wal-Mart Stores, Inc. (NYSE:WMT), but also other discount retailers like Target Corporation (NYSE:TGT).

Wal-Mart Stores

“The low income customer has had a tough time for many years, certainly through this recession they’ve recovered more slowly, that is clearly a part of the problem that all of these retailers that serve that customer are seeing,” Binder said.

He said that while Wal-Mart Stores, Inc. (NYSE:WMT) has increased their investment spending, including in the areas of labor investment, price investment, and e-commerce investment; in the case of the latter, the resulting shift to lower margin online sales from higher margin in-store ones is not necessarily a good thing.

In that same vein, Binder expressed skepticism over Wal-Mart Stores, Inc.’s (NYSE:WMT) plans to further focus on their small neighborhood stores, which are attempting to compete with the more established Family Dollar Stores, Inc. (NYSE:FDO), which have been slowly eroding their market.

“I think strategically they need to address that market, the Dollar Stores have certainly eaten into their share. Wal-Mart is going after that, they’ve accelerated the growth this year. I think that the problem is that the return on investment (RoI) in those smaller formats is actually lower than their Supercenters in the early years of maturity, and so as they accelerate that growth you’re accelerating a lower RoI format, and it just adds yet another pressure to return on investment, and I think in that type of scenario it’s hard to argue for multiple expansion,” he added.

Jefferies Group has not been the only one to weigh in on Wal-Mart in the past few weeks. Goldman Sachs downgraded Wal-Mart Stores, Inc. (NYSE:WMT) from a “Buy” rating to a “Neutral” rating on July 29. Among 22 analysts the stock has a consensus “Hold” rating, and an average price target of $79.94.

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