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A Morgan Stanley analyst reiterated an Overweight rating and $145 per share price target on Walmart (NYSE:WMT) shares Friday, telling investors in a note that Walmart’s margin pressure may be temporary.
In the note, the analyst said they had three takeaways from numerator data, including declines in discretionary categories, a minority of WMT US gross margin pressure in Q2 being from mix, and seeing trade down to WMT from higher income households.
“Per Numerator, sales in almost every one of WMT’s discretionary categories have declined throughout ’22, with particular decelerations in Q2 in Tools & Home Improvement, Home & Garden, Electronics, and Sporting Goods,” explained the analyst.
He added: “Based on our estimated breakdown of WMT US mix by category using data from Numerator and gross margins by category, we see mix as an approximate ~35 bps headwind. This is important because it means most of WMT’s gross margin contraction in Q2 (anywhere from 60%-80%) was likely driven by markdowns. We don’t know how much excess inventory WMT needs to work through in 2H, and margins could still see a drag from markdowns – but it shouldn’t linger into next year based on our math.”
The analyst concluded that Numerator data shows WMT’s household penetration among higher income households has steadily risen through 2022, from 38% in March to 40% in July.
“Meanwhile, low income and middle income household penetration rates have been more stable. This suggests higher income households are changing behaviors by trading down to discount channels like WMT.”
