Wal-Mart: $20B In Market Cap Gone In A Flash

Wal-Mart: $20B In Market Cap Gone In A Flash

Wal-Mart shares plunged today after management warned that sales for the full year will be flat, compared to their previous guidance of between 1% and 2% growth. The stock fell as much as 9.38% to $60.47 per share today, erasing more than $20 billion of the big box retailer’s market capitalization in just a matter of minutes.

The stock also reached a three-year low and is now on track for its worst trading day in 15 years. Wal-Mart’s trading volume skyrocketed as well, with more than 61 million shares changing hands by midday, compared to the average daily volume of about 8.5 million shares.

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Wal-Mart issues warning during analyst day

Companies from all sectors have been warning that the strength of the U.S. dollar against foreign currencies is weighing on their results for the last several quarters, and Wal-Mart blamed currency headwinds as well. Excluding currency exchange, the retailer said it expects sales to increase 3% year over year, reports CNBC.

Management also warned that operating expenses will probably be higher than this year’s sales growth. They cited wage increases as a problem and said those increases could raise the company’s costs $1.2 billion this year alone. Complaints about wage hikes are another common theme on Wall Street.

Wal-Mart CEO Doug McMillon said their employees deserved the wage increases but that they might not have been clear enough in explaining the highest costs from those increases. He also said it was the “right decision” to increase wages for their employees.

Wal-Mart updates guidance

Sterne Agee CRT analyst Charles Grom and his team noted that Wal-Mart management’s updated guidance at today’s analyst day was “far worse than anyone expected. Management now expects earnings per share in fiscal 2016 to fall by between 6% and 12% from their current fiscal 2015 guidance of between 4.40 and $4.70 per share. That puts earnings at about $4.15 per share, compared to the consensus estimate of $4.75 per share.

Management also expects earnings per share in the subsequent two years to be flattish and that they expect sales to grow by between 3% and 4% per year over the next three years, adding between $45 billion and $60 billion to Wal-Mart’s top light. Looking out to 2018, management expects earnings per share to rise by 5% to 10% over fiscal 2017’s results, finally reaching a level higher than where earnings are today.

One thing that surprised Grom and his team was that Wal-Mart’s guidance includes about $20 billion in share repurchases over the next two years. They noted that this suggests “significant” contraction in the big box retailer’s margins and also only “modest” sales growth.

Wal-Mart’s news drags on other retailers

Wal-Mart’s news has had far-reaching impacts across the retail sector. Dollar General shares slipped today, falling as much as 3.1% to $65.85 per share today, while Costco pulled back by as much as 1.31% to $150.28 per share and Dollar Tree tumbled 3.03% to $61.54 per share.

The Sterne Agee CRT team thinks the weakness in these three stocks presents a buying opportunity for retail investors. They added that they think Wal-Mart’s weakness is more company-specific as it has been increasing spending on e-commerce and its digital platforms. The retailer plans to spend approximately $1.1 billion on these areas while also battling in-store and pricing problems.

Further, Wal-Mart said it won’t increase spending on pricing until 2017 or 2018, which Grom and his team thinks is “a net positive” for the rest of the retail industry, especially Dollar Genera, Dollar Tree and Target. Sterne Agee CRT has a Neutral rating and $63 per share price target on Wal-Mart.

Has Wal-Mart over-earned?

Stifel analyst David Schick and his team suggest that today’s bad announcements suggest an underlying narrative that Wal-Mart “has substantially over-earned.” They think the wage increases and price investments are “just symptoms” of the big box retailer’s place in its history.

They think it’s good that management is admitting that they are competing against lower cost operators that offer more dynamic experiences for consumers, so they believe Wal-Mart has an opportunity to attract higher-income consumers. However, they also said that this is a moving target.

On the plus side, the Stifel team sees “hints” of better traction in Wal-Mart’s core U.S. business. However, they said the “basic case for over-earning is so clear” that investors “must move out their expectations for opportunities for and timing of future operating profit growth.”

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