The tub-thumping began when Walmart bought Jet.Com, an online retailer, in August 2016 and continued until it reported 2018 earnings on Feb. 20.
At the time of its acquisition, Jet had just achieved a $1 billion run-rate gross merchandise value. Walmart paid $3 billion for the company. Reporters breathlessly reported that “Walmart can overtake Amazon.”
This was nonsense, but investors bought anyway. The tub-thumping continued every quarter, with earnings topping forecasts and e-commerce growth rising sharply year-over-year. Until this quarter.
So, what happened? Why did Walmart stock lose 10% of its value in a day after reporting another 44% year-over-year rise in U.S. ecommerce sales for fiscal 2018?
People woke up.
Big Numbers, Smaller Numbers
What the fourth quarter proved is that Walmart, for all its tub-thumping, is no more taking share from Amazon than it ever was.
Walmart could report fast growth because its total e-commerce sales were one-tenth the size of Amazon’s. But in the latest quarter, those sales were up less than 25%, year-over-year. The growth had been 50%, year-over-year.
This just in: Numbers get harder to grow as they get bigger.
Walmart does not report its actual e-commerce merchandise sales. But if the company had a run rate of $4 billion per quarter in 2016, and $6 billion per quarter in 2017, then got to $8 billion per quarter in 2018, that’s steady growth of $2 billion per quarter, year-over-year, but a growth rate that is cut in half, from 50% to roughly 25%.
Hidden inside that growth was a dirty secret Walmart finally revealed. Its e-commerce margins are dropping, down 60 basis points. That doesn’t sound terrible, until you realize operating income is just 3-5% of sales. Walmart’s total operating income for the fourth quarter, $3.46 billion, was well down from the $6.20 billion of a year earlier.
Walmart isn’t really catching up with Amazon. It is still falling further behind, because, as previously noted, Amazon’s e-commerce sales were always an order of magnitude bigger.
But it’s not Amazon that’s killing Walmart.
Costco is Killing Walmart
It’s Costco Wholesale Corp. (NASDAQ:COST) that’s killing Walmart. Costco is killing Walmart’s Sam’s Club wholesale outlets — and those losses are doing much more damage to Walmart’s results than anything involving e-commerce.
Go back to the Walmart quarterly report again, because the company does break out its numbers on Sam’s Club. Sam’s Club represents $15 billion in sales each quarter, and it’s not growing at all, while Costco is now twice that unit’s size, and growing 10% each year. Operating income at Sam’s fell from $1.7 billion in 2017 to $1 billion in 2018.
That is why Walmart is closing 60 of the Sam’s Club units, 10% of the total, focusing on locations in higher-growth suburban markets more like Costco’s own locations. But it’s in these higher-income areas where Costco’s higher quality and friendly, well-paid staff are doing the most damage to it.
The Bottom Line on Walmart Stock
Walmart stock will remain under pressure. Its gains during 2017 were mainly an expansion of the increased price investors were paying for the same earnings, in expectation those earnings would expand as Walmart caught up to Amazon.
But it’s not catching up to Amazon. It’s still one-tenth the size of Amazon. And Costco is killing it on the back end. Walmart margins, overall, are down, as the problems in wholesale cut into the whole company’s results.
Watch the Walmart bulls now claim Amazon is a monopoly, while Walmart still had trailing year sales of $500 billion against Amazon’s $177 billion.
Math is hard.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.