Walmart's (WMT) mixed second-quarter performance has raised questions around the trajectory of its core US business, though its new business model could drive growth in the long term, UBS said in a note e-mailed Friday.
Shares of Walmart tumbled 9.2% on Thursday, dragging down the Dow Jones Industrial Average and the S&P 500, as its latest quarterly results showed US comparable sales growth decelerated more than Wall Street expected amid a pharmacy-related headwind. The retail giant issued a soft earnings outlook for the ongoing three-month period.
The stock was down 1% intraday Friday, and has fallen about 8% so far this year.
The moderation in the company's US comparable sales growth overshadowed its stronger-than-expected overall performance for the quarter.
"The key question was (whether) the recent trends represented a temporary slowdown driven by transitory factors such as the Maximum Fair Pricing headwind or the beginning of a more normalized growth profile for a business that has delivered several years of very strong performance," UBS analyst Michael Lasser wrote.
If such slowdown represents the start of a "more mature phase" of growth for the US retail business, then the question is whether the company would be able to stimulate incremental demand by keeping prices low, UBS said.
"While Walmart has consistently demonstrated a willingness to reinvest profits to strengthen its value proposition and expand market share, the pace and magnitude of the resulting traffic and sales benefits remain an important area of debate," Lasser said.
The bigger question is about Walmart's store-level productivity and the long-term profitability of its locations, according to UBS.
"As comparable sales growth moderates, some are assessing whether slower revenue growth could eventually pressure store-level profitability given the potential fixed-cost leverage inherent in a large-format retail model," Lasser said.
UBS trimmed its price target for Walmart to $130 from $141, but reiterated its buy recommendation.
The brokerage believes that Walmart's shift to digital commerce supports the long-term investment case for the stock.
The retailer has evolved into "a more diversified platform supported by multiple, independently growing profit streams," Lasser said, as he cited the stellar performances of other business segments in the second quarter, including e-commerce and advertising.
Price: $102.43, Change: $-1.16, Percent Change: -1.12%
