Walmart’s inventory, margin issues appear transitory - Morgan Stanley
Walmart is likely to complete its inventory clearing actions by the close of the year, according to Morgan Stanley analyst Simeon Gutman.
“WMT's gross margin contraction in Q2 (anywhere from 60%-80%) was likely driven by markdowns,” he told clients in a note on Friday. “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.”
He added that while sales in discretionary categories broadly declined, apparel sales appeared to bounce back from April. This trend suggests that Walmart’s (NYSE:WMT) “aggressive markdown strategy is working,” Gutman wrote. He expects grocery, auto parts, and pet categories will also show notable growth in the quarter given their more non-discretionary characteristics.
Elsewhere, Gutman expects the retailer’s second quarter report to reflect greater penetration in higher income households. Morgan Stanley data indicates higher income household penetration rates have increased 2% in the course of the quarter.
“This suggests higher income households are changing behaviors by trading down to discount channels like WMT,” Gutman concluded.
He reiterated a Buy-equivalent rating on the stock and assigned a $145 price target to shares.
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