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Walmart could get squeezed alongside its ‘middle of the middle’ U.S. shoppers, analysts say

Walmart Inc. was downgraded to sector weight from overweight at KeyBanc Capital Markets with concerns that the retail giant could be hurt alongside its key middle-class customers and feel wage pressure.

“Since our initiation, Walmart has undergone a transformation into arguably one of the strongest omnichannel U.S. retailers,” wrote KeyBanc analysts in a report looking ahead to internet retail in 2022.

“However, 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. Walmart is also the largest private U.S. employer (2.3 million-plus employees), and we think wage pressure will continue to intensify.”

See: Kroger stock upgraded but grocers face hurdles from inflation, store traffic and more in 2022, says Bank of America

Like many other companies and consumers, Walmart
WMT,
-1.82%

is taking a hit from inflation, which is adding one more factor to the comparison with last year when shoppers received government stimulus payments.

On the other hand, analysts maintained their overweight stock rating for Target Corp.
TGT,
-1.14%

“Overall retail wage inflationary pressures are likely to impact Walmart disproportionately,” wrote analysts led by Edward Yruma.

“Food inflation will be more impactful to Walmart given its focus on grocery (56% vs. 20% at Target), and we think Target’s more affluent consumer base will prove more resilient.”

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Analysts also call out the executive departures from Walmart. On Thursday, The Wall Street Journal reported that the company’s U.S. e-commerce head, Casey Carl, would be leaving. Walmart’s chief merchandiser and chief customer officer are also stepping down.

Also: ‘Fighting inflation is in our DNA’: Walmart says its pricing and inventory can deliver for the holidays

“While Walmart has a very deep management bench, we continue to monitor
changes closely given the success of the team,” KeyBanc said.

Walmart stock is down 2.6% over the past year. Target has gained 18.3% for the period.

KeyBanc expressed confidence in Etsy Inc.
ETSY,
-2.59%
,
upgrading that stock to overweight from sector weight. Etsy has “a 3x revenue opportunity long term,” according to the research group’s new “Key 3x framework.”

“In terms of TAM [total addressable market], we believe that Etsy has made significant strides in lowering buyer friction,” KeyBanc wrote.

“Etsy participates in a number of sizable verticals (home décor, apparel, jewelry), but the perceived friction (delivery time) of the platform has always been an inhibitor to wider adoption.”

Etsy has also made acquisitions, including Depop, which taps into Gen Z and the growing secondhand retail trend.

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“More importantly, our channel work has affirmed that Depop is viewed as a leading Gen Z and millennial apparel resale site, and in particular, is viewed as a source of trend-right apparel. We think this serves as a key differentiator to other sites,” KeyBanc said.

Etsy shares have fallen 25.7% over the last 12 months.

And KeyBanc downgraded WW International Inc.
WW,
-2.31%
,
formerly Weight Watchers, to underweight from sector weight. Analysts say that the response to the company’s new PersonalPoints Program has been “mixed, and we think skews negative.” And the company’s move towards an app-based interface has lowered the level of ease for users who would prefer to head to the website.

In addition, WW is faced with a shifting perception of dieting and body image.

“The anti-diet movement is gaining steam and there has been a shift in diet culture among Gen Z and millennials, with a greater focus on body inclusivity,” KeyBanc said.

“As a result, recent news reports on dieting and weight loss have placed greater emphasis on mindful/intuitive eating as a more effective, and often safer, means
for long-term weight loss and/or weight management.”

WW stock has sunk 48.2% over the past year. The benchmark S&P 500 index
SPX,
-1.17%

has gained 16.9%.

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