Wal-Mart Stores, Inc. (NYSE:WMT) seems to be failing to keep shoppers happy, which could signal rough waters ahead for the big box retailer. Analysts at Cowen and Company said they think investors are already pricing in improvements at Wal-Mart, but they don’t think this is likely because store traffic in the U.S. has been highly volatile.

Wal-Mart Stores, Inc. Coverage Initiated At 'Market Perform': Cowen

Cautious on Wal-Mart

In a report dated Dec. 16, 2014, analysts Oliver Chen, Steven Zaccone and Courtney Wilson said they remain cautious on Wal-Mart Stores. However, they do note that the retailer recently reported its first positive U.S. comparable sales since the fourth quarter of 2012.

A theme is emerging among this Cowen team’s recent reports, as they seem to be more bullish on luxury retailers and less so on retailers that target the lower end of the retail market.

Consumers not happy with Wal-Mart

One of the main reasons the Cowen analysts are so cautious on Wal-Mart is because of the results of their recent proprietary survey of shoppers. The big box retailer’s core customer has a household income of between $35,000 and $50,000, according to them.

These shoppers continue to be price sensitive and remain “frugal with spending,” the analysts say. They add that falling gas prices should help with discretionary spending and savings next year, but the lower income bracket continues to struggle. Low wage increases, higher food and healthcare costs and higher unemployment rates than the national average continue to weigh on this demographic, which will affect their spending.

The Cowen analysts say their proprietary survey indicates that shoppers whose average income is less than $50,000 haven’t been as satisfied with their shopping experiences in general at Wal-Mart, particularly in customer service and pricing.

Wal-Mart invests in online shopping

The analysts say they are encouraged though by how aggressive Wal-Mart has been in spending on e-commerce. They estimate online sales will be about $12.5 billion or 2.6% of the company’s sales in the 2015 fiscal year.

They like Wal-Mart’s in-store pickup and ship-from-store initiatives, as well as the retailer’s focus on mobile shopping, which they say will boost traffic. However, they add that the company still faces stiff competition from Amazon.com, Inc. (NASDAQ:AMZN) and other brick and mortar retailers that are also heavily investing in their online presences.

Currently Wal-Mart’s online business is operating at a loss. The Cowen team said the big box retailer will probably have to keep pumping significant amounts of capital into it in the next three or four years until it becomes profitable.

Wal-Mart Stores coverage initiated with Market Perform

The analysts do like how Wal-Mart has been increasing the rollout of its smaller Neighborhood Market stores, which they say is in line with a growing customer preference for convenience stores instead of big box stores.

They also like the string of positive comparable sales the company has been posting and expect it to steal share from dollar stores, drug stores and grocery stores. The big box retailer is planning to open up at least 200 new Neighborhood Market stores in the 2016 fiscal year.

The Cowen team sees a “compelling” opportunity for Wal-Mart internationally, as non-U.S. revenue is now 29% of the retailer’s total revenue. However, they say more work must be done to improve margins in the company’s international operations.

They initiated coverage on Wal-Mart Stores, Inc. with a Market Perform rating and price target of $83 per share.