Analyst offers bear case on Walmart

William Blair & Company analyst Mark Miller has followed Walmart for a long time, but he didn’t have much good to say about the company when he issued a downgrade this week.

Miller lowered his rating on Walmart to underperform from market perform and cited some familiar and unfamiliar concerns. For example, one of his main concerns related to Walmart’s size and complexity which he contends reduces dynamism and growth.

“While Wal-Mart has many scale advantages, we perceive the company’s size also poses unique challenges. The company is held to high standards - employee wages, its impact on the environment, and global compliance - as it should be, but Wal-Mart operates under the microscope in ways that many of its smaller

competitors do not,” according to Blair.

He also mentioned incremental risks with e-commerce competition, particularly as Walmart’s large stores are less favorably positioned for a consumer who is increasingly buyer individual items online. He did note Walmart has made improvements in the area of e-commerce, but not enough to narrow the gap with competitors.

Also concerning for Miller is a perception that Walmart’s execution is lacking and merchandising is missing newness.

“Walmart’s domestic comp-store sales are trailing broader retail sales growth, and same-store traffic is declining. Whatever the reasons, customer satisfaction at Walmart is significantly lower than that of other retailers in our coverage,” according to Miller. “Merchandising innovation has decelerated, in our estimation, resulting in a smaller uplift to sales. Specifically, we have observed a steady decline in the number of new product introductions over the past several years.”

On the issue of Walmart’s accelerating rollout of smaller stores, Miller’s view is that the strategy is prudent given competition from convenience-oriented operators, but cannibalization of larger stores is inevitable.

Another issue that isn’t specific to Walmart, but nonetheless would affect the company’s share price, is the prospect of investors rotating away from the retail sector because of economic cycle concerns.