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Walmart stock may crater after execs host its big investor day in 2020

Brian Sozzi
Editor-at-Large

Walmart (WMT) has been a pretty easy story for investors to understand for the better part of a year.

But, the million-dollar question now is whether that’s all about to change in a big way.

The Bentonville Bruiser will host a closely watched meeting with the investment community at the New York Stock Exchange on Feb. 18. It’s expected to be quite the whirlwind day for executives and sell-side analysts. Not only will Walmart drop its fourth quarter earnings at 6:00 a.m. ET and share its initial 2020 outlook, but the management team will give extensive presentations on the state of affairs at the world’s largest retailer.

Hopefully the caffeine from Walmart’s Great Value private label soda is flowing hard in the room.

Ahead of the financial spectacle, Walmart finds its stock badly lagging what has been another melt-up in the broader markets. Walmart shares are down 3.2% in the past three months per Yahoo Finance data, underperforming the 6.3% rise in the Dow Jones Industrial Average. The S&P 500 has tacked on an impressive 9.5% during that stretch.

Based on our chats with sources, the weakness in Walmart’s stock right now boils down to several factors. Taken together, these factors call into question whether Walmart will be the can’t miss stock it was for most of 2019 in 2020.

Here are a few concerns we are hearing.

The Target effect

Red-hot Walmart rival Target — Yahoo Finance’s 2019 Company of the Year — hit a bit of a speed-bump during the holiday season. Amid a shorter holiday shopping season and shaky consumer confidence (thank you China trade war), Target’s sales noticeably missed Wall Street estimates.

Wall Street is worried that Walmart — which has not had similar sales and profit momentum as Target this past year — also saw its holiday sales come up very short. In turn, that could pressure the stock especially if Walmart bakes that letdown somehow into its first crack at 2020 guidance.

Morgan Stanley analyst Simeon Gutman just slashed his fourth quarter Walmart U.S. store sales estimate to 2% from 2.5%. That would be far slower than the year-to-date U.S. sales growth rate (through the third quarter) in the U.S. of 3.1%.

“WMT should not have been immune to headwinds that drove disappointing Holiday results at TGT and other retailers (weakness in key Holiday categories and a shorter selling period). Additionally, SNAP timing headwinds, while transitory, may have been incrementally worse than expected,” Gutman says.

Points out Deutsche Bank analyst (who also lowered his fourth quarter U.S. sales estimate) Paul Trussell, “Investor sentiment has turned neutral to negative in recent weeks, given TGT's Holiday SSS miss (Walmart U.S. & TGT SSS have a 96% correlation over the last eight quarters), continued AMZN overhang with one-day shipping, and what bears view as a lack of ability to continue the beat & raise story, which would likely put a cap on valuation.”

Online money pit

Wall Street has high expectations on Walmart’s e-commerce business for 2020. But not solely on sales, finally the bottom line as well after years of analysts giving Walmart the benefit of the doubt. This is the year, experts say, that Walmart’s online business is seen turning the corner on the profit line from deep losses to greatly reduced losses. With Walmart de-emphasizing certain online apparel brands it acquired (ModCloth) and restructuring its web business — not to mention expanding services and digital selection — the retailer has succinctly ratcheted up analyst expectations.

The problem is, the e-commerce business may not be ready to turn the corner on profits. And that could perhaps surprise a good many on the Street.

Gutman estimates Walmart’s U.S. e-commerce business will lose about $2.1 billion on an operating profit basis this year. That would be up from $1.9 billion in losses in 2019.

Says Gutman, “We previously believed e-comm losses would peak in F'20. We now estimate losses will grow in F'21 primarily because e-comm margins remain negative alongside a growing top-line base.”

Walmart President and CEO Doug McMillon. (Gareth Patterson/AP Images for Walmart)

None of this to take away from Walmart’s solid year or so of operating performance — in many respects this is a completely different company under the steady hand of CEO Doug McMillon (for the good). Walmart has put up six quarters of operating income growth in its key U.S. business and gained market share by expanding services such as buy online and pickup in store. The company’s grocery business has also vastly improved in terms of selection, service and quality, and inventory at U.S. stores is being better handled.

But besides the concerns listed above, the billions of dollars Amazon is spending on one-day shipping is starting to take hold in the industry and a host of recent management changes at Walmart are red flags worth monitoring. Moreover, Walmart sources a huge amount of inventory (the old rule of thumb being close to 70%) from coronavirus stricken China. It’s unclear how that situation will impact Walmart’s inventory flow this spring and by extension, it’s financial outlook.

So, this is no normal investor day for Walmart. Indeed the entire day could end in the stock closing with a thud.

It should be noted that Walmart has told Yahoo Finance its investor day is closed to the media. It will be live-streamed on Walmart’s investor relations page. The company has declined to make anyone from the executive team available for interviews from the event, citing “tight” scheduling.

So, here’s to the Wall Street community hopefully getting their post insider access stock calls correct. As for the average investors on the livestream, they may be left wondering if Walmart’s stock is a great buy on weakness, one worth continuing to ride following a solid 2019 of operating performance or one to completely avoid.

Until then, enjoy weekend grocery stock up.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Watch The First Trade each day here at 9:00 a.m. ET or on Verizon FIOS channel 604. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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