What: Shares of Wal-Mart (NYSE:WMT), the largest retailer in the world, finished Friday's trading session higher by $0.78, or nearly 1%, to close at $84.30 despite receiving a rating downgrade and price target cut from Barclays.
So what: According to Meredith Adler, Barclays managing director, the reason for downgrading Wal-Mart to "equal weight," or the equivalent of a "hold," from "overweight" ties into the fact that the analysts see no relevant near-term catalysts to send its shares higher.
In an interview with financial news network CNBC Adler noted that while Wal-Mart has announced investments in its work force and infrastructure, it's unclear how far out Wall Street and investors need to look before they begin to see real improvement. Adler specifically pointed out that while Wal-Mart will increase wages for workers, the boost will be modest at best, and it could simply be front-running a federal minimum wage increase. Adler identifies worker morale as one area the company could really focus on to improve its results.
In terms of efficiency, Adler also believes there's little left for Wal-Mart to do in terms of trimming costs. Wal-Mart already laid off workers and improved its margins, leaving the company near peak levels of operating efficiency.
With that in mind, Barclays issued its rating downgrade and cut its price target on Wal-Mart from $90 to $85.
Now what: The question that investors need to ask themselves here is whether this weaker view of Wal-Mart makes sense. In other words, is Wal-Mart's stock set to muddle around in the $80s for a while?
I would argue that based on the company's fourth-quarter results the downgrade appears justified.
On one hand you certainly have to give credit to Wal-Mart for transforming itself into a one-stop shop. Its continuing push into groceries keeps consumers in its stores longer and encourages them to buy high-margin discretionary items that really pack a punch for Wal-Mart's bottom line. It also still holds true that Wal-Mart's size gives it an advantage when buying products in bulk. With few retailers of its caliber, it's able to negotiate favorably low purchase prices.
But, there are a number of uncertainties associated with its comprehensive changes aimed at boosting worker pay. The retail industry is known for its high turnover rates, so I'll be curious to see if the move does indeed boost morale and lower turnover, which can be key factors in creating a cohesive team in each store. Another key concern is what the Internet could be doing to Wal-Mart's business. Obviously, Wal-Mart is still finding ways to expand, but that expansion is at a snail's pace compared to its historic growth. Presumably, Wal-Mart is facing tough pricing competition from online retailers.
While I don't think you can safely bet against Wal-Mart over the long term considering its strategic purchasing power and handsome dividend yield, I'd also be in no rush to buy it here, either, especially after it offered guidance for the upcoming fiscal year that was well below Wall Street's consensus.