JPMorgan Sees Shift in WalMart Strategy as Sales Stagnate

NEW YORK (TheStreet) - JPMorgan says recently-appointed CEO Doug McMillon is working to shift WalMart's (WMT)  growth strategy to offset fears that the company's revenue growth and comparable store sales have plateaued.

McMillon may be pulling back on WalMart's efforts to enter the grocery business, a business pushed by recently-retired CEO Mike Duke that has had mixed success, said a team of JPMorgan analysts led by Christopher Horvers in an investor report published July 7. Rather than attempting to sell low-price consumer goods, McMillon plans to emphasize WalMart's merchandising offerings, its e-commerce capabilities and its smaller-sized food markets, said the analysts.

McMillon's plan, while leveraging some investments made by Duke, appears to be a shift in strategy for the largest U.S. retailer. WalMart was adding 0.3% to $75.95, trimming its 2014 decline to 3.5%. The S&P 500  has gained 6.9% this year.

Last week, JPMorgan hosted a meeting between WalMart's top brass and Wall Street analysts in a rare private meeting for the retailing giant. On Monday, JPMorgan said it came away from the meeting with the view that McMillon is attempting to alter WalMart's growth strategy.

WalMart CEO McMillon Sees Broad Mandate at Private Investor Meeting

"Overall we walked away seeing a shift in the core Wal-Mart strategy to disciplined pricing and improved merchandising as a means to drive same store sales with Neighborhood Market expansion and enhanced omni-channel capabilities as a means to gain share with new and existing customers," the JPMorgan analysts, wrote on Monday.

"While the small box and ecommerce focus emerged under former CEO Mike Duke, the key differentiation vs. the prior regime is a forthright recognition that price investment in grocery can only go so far to drive traffic/share and in-store conversion across categories can be enhanced by the art of merchandising (with newness a key focus) and higher on-shelf availability (vs. simply relying on halo sales from customers in the store buying groceries)," said the report led by Horvers.

JPMorgan rates WalMart a 'neutral' with an $80 a share price target, indicating that McMillon's shift in strategy will be hard to pull off.

Analysts at the firm believe that even with McMillon's moves, WalMart faces the prospect of peaking or plateauing same store sales. JPMorgan also said on Monday that WalMart may disappoint consensus expectations when the company provides updated 2014 guidance in its second-quarter earnings results.

Wall Street Sees Change at Wal-Mart

As TheStreet first reported, other Wall Street analysts also took Wal-Mart's meeting as an indication that changes to the company's business strategy is likely under McMillon.

Credit Suisse analysts said on Thursday they believed McMillon indicated he's been given a broad mandate by WalMart's board of directors to shake up the company's executive ranks and M&A strategy.

Like JPMorgan, Credit Suisse also said that McMillon will likely invest on improvements to WalMart's merchandising, e-commerce and in-store sales offerings. The goal for McMillon appears to move from away from WalMart's reliance on volume as a driver of same store sales. Instead, WalMart may look to use expanded merchandising efforts, in addition to e-commerce platforms as a means to improve the company's pricing and profit margins.

Simply putting a stop to declining margins could go a long way for McMillon. Over the past 12-months, JPMorgan calculates that WalMart's comparable store margins have fallen 25 basis points-to-30 basis points a quarter. A more disciplined strategy in price-based investments may slow or even stop further margin declines.

Year-to-date Wal-Mart shares have fallen over 3% when excluding dividend payments. Wal-Mart shares have also gained less than 1% in the past 12-months, when excluding dividends, dramatically underperforming the S&P 500 20% gain over that time horizon.

Bottom Line: WalMart's CEO Doug McMillon spent a holiday-shortened week communicating a new vision for WalMart in a rare private meeting with the buy-side and sell-side. Expect that second quarter earnings will underscore McMillon's efforts.

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-- Written by Antoine Gara in New York

Follow @AntoineGara

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