Wal-Mart Scandal: 'Huge Distraction' for Retail Giant

A weekend New York Times report highlighted various bribery allegations in Mexico against top Wal-Martexecutives.

Most analysts believe the scandal will hit company shares, with one saying the stock could see a 17 percent drop.

Retail analysts took a dim view of Wal-Mart's bribery scandal, with most recommending that investors use the controversy to take profits while the controversy swirls around the world's leading big-box store.

Walmart Stores
Source: Walmart
Walmart Stores

Wal-Mart shares slid on the first trading day following explosive weekend allegations that the company violated the Foreign Corruption Practices Act by paying off Mexican officials who oversaw the company's expansion plans. The Wal-Mart briberyallegations were reported by the New York Times and soon caught fire across the business world.

While few expected Wal-Mart to sustain long-term fundamental damage over the scandal, the majority opinion was that the case would hurt the company's expansion plans and possibly even lead to arrestsand a major corporate shake-up.

"Unlike prior bad PR stories in recent years, this will be a material distraction for Wal-Mart on multiple fronts," said Charles Grom, research analyst at Deutsche Bank Markets Research. Grom reiterated his "sell" position on the company with a price target of $53, a drop of about 17 percent from its opening price Monday.

Grom predicted the bribery charges "will be a huge distraction for the company for quite some time and could potentially include jail time for both current/former employees," adding that "if proven true, the allegations would put a broadside in the growth engine of the company."

Expansion prospectswere chief among concerns for analysts following the company.

South of the border, Wal-Mart Mexico is the top private employer with some 2,100 stores, a success it is hoping to replicate across the globe. But with a bribery scandal and a likely long parade of salacious headlines in the future, such growth could be jeopardized.

"Articles like this will be used against the company by activists and competitors when it attempts to open stores in the US and abroad and could make it more difficult to attract management talent in international markets," said Wayne Hood, analyst at BMO Capital Markets.

"Investors who are already unhappy with the results in certain international markets will scream even louder about returning capital to shareholders rather than making international acquisitions," he added.

Hood nevertheless has a "market perform" rating on Wal-Mart, which has outperformed its peers over the past year with a 15 percent gain, while other large retailers have lost 41 percent, according to Thomson Reuters I/B/E/S.

Indeed, not everyone is so pessimistic about the company's prospects, and some even think a selloff could present an opportunity.

"While it remains too early to know the validity or repercussions of the bribery allegations...we believe WMT is dedicated to a thorough and transparent review after discussions with the company," Citigroup's Deborah Weinswig said. "We would use any weakness in the stock as an enhanced buying opportunity."

Of analysts weighing in Monday, Weinswig had the strongest opinion, holding a $69 price target that would represent a 7.5 percent gain.

Others were somewhere in the middle, with Robert W. Carroll, an analyst at UBS Investment Research, using past FCPA violations as a guide for what Wal-Mart might be facing. Carroll put a $59 target on the company, which was right around where it traded in heavy stock marketaction Monday.

He pointed out that Siemens paid the largest-ever total settlement of $1.6 billion for FCPA violations, while a Halliburton subsidiary paid the most — $529 million — as a percentage of sales, at 3.2 percent, in a 2009 case. Most settlements, he said, are in the range of 1 percent to 2 percent of sales, which would put Wal-Mart in the $4.5 billion to $9 billion range, easily smashing the record.

"We believe an ongoing FCPA investigation will have no impact on WMT’s day to day Mexico or U.S. operations," Carroll said. "However, given WMT’s high visibility as the world’s largest retailer, Walmex could see new store growth slow if authorities feel pressured to showcase scrutiny applied to retail permitting."

At MKM Partners, Patrick G. McKeever Jr. said he doesn't "see any major fundamental implications at this juncture" but expects that "the story seems big enough and credible enough to exert pressure on the stock as investors sift through the potential legal and reputational ramifications."

A management shakeup, he said, could have substantial impact.

"While we’re not sure it will come to that, if it does, that could certainly have some negative fundamental implications as Wal-Mart’s current executive team has been starting to 'gel' better over the past two to three quarters and is making progress with key initiatives after a period of leadership changes and inconsistency," McKeever said. "Accordingly, we would view any new changes in management as potentially disruptive to the improving fundamental trend we have seen recently."

He put a $60 target on the stock.