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Wal-Mart is doing the right thing despite stock plunge, analysts say

Shares of Wal-Mart plunged as much as 10 percent on Wednesday after the company warned during an analyst meeting that revenue would be flat in fiscal 2016 and profits would fall 6 to 12 percent the following year

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Danny Johnston/AP/File
Wal-Mart Store, Inc., Chief Executive Officer Doug McMillon speaks at the Wal-Mart shareholder meeting in Fayetteville, Ark. Wal-Mart on Wednesday, Oct. 14, 2015 said it expects profit to fall for its next fiscal year and cut its sales outlook for this year as it works to fend off intensifying competition and perk up stores with better customer service.
  • By Tom DiChristopher CNBC

Wal-Mart's guidance shocker was actually no surprise, Moody's Charles O'Shea said Thursday.

Shares of Wal-Mart plunged as much as 10 percent on Wednesday after the company warned during an analyst meeting that revenue would be flat in fiscal 2016 and profits would fall 6 to 12 percent the following year. Wal-Mart attributed to the guidance to its investments in wages, e-commerce and store improvement. 

In an interview on CNBC's "Squawk Box, "O'Shea said it was possible to back into the numbers, given previous comments from Wal-Mart about the cost of wage hikes. The fixed-income analyst added that the news is only bad for investors taking a short-term view.

"We take a longer-term view here. We think this is a good idea going forward as you try to turn the battleship," he said. "This is exactly what we feel the company needs to do, and every other brick-and-mortar retailer needs to do this kind of stuff."

"They have to invest in their employees. They have to invest in price. And they have to invest in e-commerce," he added.

The retailer plans to increase wages for a half-million workers to $10 an hour next year at a cost of $1.5 billion. A pay bump to $9 an hour this year will cost about $1.2 billion in 2015, Wal-Mart said. The company will also put $1.1 billion into shoring up its digital platforms.

At the same time, a strong U.S. dollar is creating headwinds for Wal-Mart.

CEO Doug McMillon has faced criticism from some corners of Wall Street for declining to prepare analysts for the news ahead of the meeting. In an interview on "Squawk Box" before of the event, he said Wal-Mart would provide three years of guidance, but did not indicate fiscal year 2017 profit would fall.

McMillon acknowledged the high costs of Wal-Mart's investments, but said they had helped the retailer turn around customers' perceptions of its stores.

Oliver Chen, Cowen & Company retail analyst, reiterated his buy rating and price target of $77 on shares of Wal-Mart, citing the company's announcement that it expects continued improvement in traffic and same-store sales.

"There is a retail revolution going on with the transformation of Wal-Mart," he told CNBC's "Power Lunch" on Wednesday. "The power is really shifting to the customer, and Wal-Mart has to offer a lot more convenience, and doing that costs money."

DISCLOSURE: Neither the analysts nor their families own shares of Wal-Mart.

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