“We believe that the lack of stimulus tailwinds and continued inflationary pressure may disproportionately impact Walmart’s ‘middle of the middle’ U.S. consumer near-term,” KeyBanc analyst Edward Yruma wrote in a Wednesday commentary.
“WMT is also the largest private U.S. employer (2.3 million employees), and we think wage pressure will continue to intensify.”
The Bentonville, Ark., company has increased wages for the past three years, with more of its employees becoming full-time workers, Yruma said.
Yruma affirmed his overweight rating on Walmart's Minneapolis competitor Target (TGT) - Get Target Corporation Report, “given its lower penetration of food (20% versus WMT at 56%) and its higher-income consumer base,” he said.
“We remain positive on both long term, as we think there will be continued share gains, but tactically we prefer TGT for 2022.”
On the bright said for Walmart, its “share gains could accelerate as the U.S. consumer looks for value,” Yruma said.
“WMT has had a history of operating through times of inflation and economic downturn, while effectively managing costs and maintaining margins.”
In terms of valuation, “Both WMT and TGT have seen significant multiple expansion over the past three years, and we think multiple expansion will moderate,” he said.
“In this environment, we think that earnings growth will be the primary driver of outperformance.”
Yruma didn’t specify a price target for Walmart. He has a $280 price target for Target.
Target recently traded at $228.54, up 2.1%, and Walmart traded at $143.81, little changed.