Walmart is paying back.
On Wednesday, at its annual investor day, the company cut its outlook for profits over the next two years and forecast a drop of 6% to 12% in 2017.
After the news, shares fell by as much as 10%. This wiped out about $18 billion of the company’s market value and was the worst drop for the stock in over a decade.
In a note to clients, Stifel analysts wrote:
While the headlines suggest WMT’s guidance specifics disappointed or WMT is entering a “reinvestment period” – we think the underlying narrative is far more important. The market is reacting to meaningful evidence that WMT has substantially over-earned. WMT calls out specifics of wage and price investments – and yes these are discrete actions taken by WMT; but we believe they are just symptoms of where WMT sits in its history.
In other words, Walmart’s been able to earn profits by pushing an unsustainable price and cost strategy. And now it’s payback time.
Previously, Walmart kept its expenses on wages low and instead focused on its share of the retail market. That’s a strategy that probably worked, since Walmart is the world’s largest retailer.
Wednesday’s news, however, is an indication that this has switched and that Walmart may have overearned all along.
While the wage hikes are good for workers, news that they would hurt profits down the road is bad for investors.
The analysts wrote: “On the positive side we think there are hints of better core US WMT traction in the meeting thus far – but the basic case for over-earning is so clear to us that investors must move out their expectations for opportunities for and timing of future operating profit growth.”
Stifel has a “hold” rating on the stock.
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