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The Ratings Game: Walmart faces labor, supply-chain pressures on margins despite earnings beat and holiday optimism, analysts say

Walmart Inc.’s most recent earnings beat expectations, but analysts are concerned about the impact that labor costs, supply chain and other factors will have on margins.

Walmart
WMT,
-0.86%

shares slipped on Tuesday despite the upbeat report.

See: ‘Fighting inflation is in our DNA’: Walmart says its pricing and inventory can deliver for the holidays

“We are constructive on Walmart’s 3Q results, especially comps +9.2%, and believe the retailer is early in its transformative ecosystem journey,” wrote Cowen analysts led by Oliver Chen.

“That being said, supply chain, inflation, and labor pressured margins, and will remain a headwind over the coming quarters.”

Analysts say they expect a “strong quarter” from the retail giant, with inventory up after actions taken to get around supply chain congestion, including chartering their own ships.

“We believe improving U.S. comps and the health of the U.S. consumer are key positives for the stock and believe top-line momentum is set to continue in FY22, driven by price investments and an improved store experience,” Cowen said.

Walmart is also expanding other areas of its business, like advertising through Walmart Connect, which is up 240% on a two-year basis, and Walmart GoLocal, the company’s delivery service.

“Inflation will serve as a headwind to gross margins for the foreseeable future, but
we think advertising, marketplace, and other initiatives can provide significant
offset,” wrote KeyBanc Capital Market analysts led by Edward Yruma.

“Near-term conditions look favorable, but wallet share shifts (toward travel/
experiences) may be a headwind in 2022.”

KeyBanc rates Walmart stock overweight with a $180 price target.

Also: Target blows past quarterly earnings expectations and says shelves are full for holiday season

Raymond James says Walmart is a long-term winner, but investors are watching closely for the impact that industry-wide challenges will have.

“On the negative side, we did sense some investor concern about SG&A dollar growth (q/q and y/y),” analysts said.

“Admittedly, the growth was above our expectations and will likely remain a focus given the labor environment.”

Raymond James rates Walmart stock outperform with a $170 target price.

“We continue to believe that Walmart is under-earning relative to its potential,” wrote BMO Capital Markets in a note.

“And while there was progress on Walmart’s higher-margin initiatives (Walmart Connect noted +240% 2-yr stack), it was difficult to see progress flow through in Q3, yet we believe investments through 2021 position Walmart well to continue balancing earnings growth and share gains.”

BMO rates Walmart shares outperform with a $170 price target.

Walmart stock has slipped 1.5% for the year-to-date, and has fallen 5.8% over the past three months. The Dow Jones Industrial Average
DJIA,
-0.58%

has gained 17.4% for 2021 so far.

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