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TheStreet.com's AAP Team Goes Bearish on Walmart

Walmart's inventory levels were still at historic levels exiting the April quarter, the team said.
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A weak earnings report has sent Walmart  (WMT) - Get Walmart Inc. Report shares tumbling to a 16% decline since May 16. 

TheStreet.com's Action Alerts Plus team sees continued trouble ahead for the giant retailer.

“Walmart is the largest grocer in the U.S., and we like that that tends to spur repeat visits and should continue to do so as consumers look to overcome higher food prices,” the team wrote in a commentary.

“But the company's overall inventory levels were still at historic levels exiting the April quarter. 

"At $61.2 billion, Walmart's inventory exiting April was larger than all the inventory at Target  (TGT) - Get Target Corporation Report , Foot Locker  (FL) - Get Foot Locker Inc. Report, TJX Companies  (TJX) - Get TJX Companies Inc. (The) Report, Ross Stores  (ROST) - Get Ross Stores Inc. Report, Home Depot  (HD) - Get Home Depot Inc. (The) Report, Kohl's  (KSS) - Get Kohl's Corporation Report, and BJ's Wholesale  (BJ) - Get BJ's Wholesale Club Holdings Inc. Report combined.”

That could be a problem for Walmart’s profit margin, the AAP team said. 

Walmart’s earnings estimates imply it expects earnings per share (EPS) to total about $3.70-$3.75 in the second half of the year, up more 35% from the first half of the year, the team said.

“That would be the strongest levels of EPS growth in some time,” it said. 

“Tracing Walmart's second-half EPS growth versus the first half over the last several years, it's ranged from effectively 0% to a high of 19.5% in 2015.”

The bottom line is clear. 

“We are somewhat skeptical the company can deliver that level of EPS growth in the second half, especially if fuel costs remain at elevated levels,” the team said.

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But not everyone is bearish on Walmart.

The Bullish Case for Walmart

“Walmart has just sold off too hard. Quality defense is on sale here,” Wells Fargo analyst Edward Kelly wrote in a commentary.

“In hindsight, Walmart's first-quarter update actually looks good now, as it only lowered guidance by 5%,” Kelly said.

In addition, the earnings report “indicated that most of its issues (labor, general merchandise markdowns, high fuel costs) have been or are being addressed in a timely manner,” Kelly said.

“The company didn’t express concern around ocean freight in our call back.”

In the big picture, the company still has high points.

“Walmart has qualities investors should want in a defensive name at the moment, as its leading price gaps should yield share gains as consumer trade down,” he said. “And it is in the best position to push back on additional vendor pricing.”

There were some dark spots, however. 

“We do have some concern that maybe Walmart didn’t cut guidance enough after Target’s [earning report],” Kelly said.

“But the stock price already seems to account for this risk. We would be buyers of WMT at current levels,” Kelly said. 

Walmart was then trading at $119.50. It recently stood at $124.13.