Every quarter over the last few years seems to be a make it or break announcement for those stocks in the retail sector. This includes retail giant Walmart (NYSE:WMT).
So far, Walmart stock has been moving successfully in the new retail paradigm. Walmart has acted quickly to improve both its online sales and in-store experience. This focus on omnichannel has continued to pay benefits. Sales are rising and it has begun to take back some much-needed market share from rivals.
But as rivals have acted equally as quick, Walmart finds itself once again back in “show me” mode. With earnings for the firm later this week, e-commerce and the growth of omnichannel sales will be the only thing that matters. And there’s a good chance that WMT stock may just deliver on that front.
Walmart Faces Its Threat Head-On
Retail has long been a cut-throat business. But, unless you’ve been living under a rock, the sector has gotten even more violent over the last few years. Amazon (NASDAQ:AMZN) has been clearly doing the most damage. Thanks to AMZN, traditional retailers have been forced to move outside their comfort zones and spend heavily to compete. Walmart has taken this task head on with gusto.
Over the last few quarters, WMT has unveiled a variety of new apps, commenced on a variety of logistics upgrades, beefed-up omnichannel operations and underwent a massive buying spree of several major e-commerce properties. This included low-price algorithm-heavy Jet.com and Millennial favorites Moosejaw and Bonobos as well as more recently Art.com and lingerie retailer Bare Necessities.
By in large, these efforts have continued to work for Walmart and have resulted in some torrid growth.
Last quarter, Walmart reported a huge 43% jump to its online sales. This follows a 33% jump in the previous quarter. For the full year, WMT achieved its target e-commerce sales growth of 40%. That’s really impressive for such a large firm like Walmart. After all, it pulled in more than $138 billion in total sales last quarter.
With the firm reporting later this week, investors will be looking to see if the moves are continuing to pay off. Not only with actual growth, but with profits as well.
Online Sales and A Bit More for Walmart
One of the problems for Walmart and other rivals like Home Depot (NYSE:HD) trying to compete in the blurred online/in-store world is that it takes a pretty hefty penny to do. Last year, WMT spent over $10 billion in upgrading its business model to better compete against AMZN and the like. It plans on spending more than $11 billion this year on store/e-commerce CAPEX … with the bulk going toward omnichannel and adding more products to its online operations.
Clearly, these efforts are working in that they are generating sales. The question is, are they generating actual profits? This problem is something that is plaguing many retailers as they spend heavily. Walmart has acknowledged the issue last quarter when overall sales grew by just 4.1%, but operating income grew by barely 2%. Walmart CFO Brett Biggs said that investors should “expect our losses in e-commerce to increase in fiscal 2020.” Because of rising costs, executives at the retailer actually expect operating income to sink by about 3% year-over-year this quarter.
While investors have been warned that losses will continue, any surprises here may not be good enough and eventually, investors will be looking for some actual bottom of the line results from Walmart. You can only grow sales so far before investors start looking for more. Specifically, investors are going to be looking at what WMT is doing to improve its profitability online. Shifts to higher margined items and upselling of add-ons will be critical this quarter. That’s where the focus should be for those thinking about adding WMT stock. Just how is the retailer going to right the ship?
Walmart Faces a Lot of Pressures
After two years of rising e-commerce growth, this quarter, Walmart is under a lot of pressure to get it right. With its results, investors are going to want to have their cake and eat it too. The firm will need to deliver on not only rising online sales but start to make those sales/spending count in the profitability column. To be honest that might not be possible in the short run.
Even Amazon isn’t necessarily profitable in its retail operations all the time. It’s the other stuff — AWS, ad sales and services — that generate AMZN’s gains. Likewise, margins remain small on Home Depot’s successful online operations.
But for patient investors, the longer term is rosy and any mishaps here could provide a great opportunity. These efforts will eventually pay off through gains in market share. And if anybody can profit from low margins, it has to be the low-margin king. The key is to focus on what WMT is saying about its moves, not so much the actual headline number. If investors react poorly to the headlines, it could be a chance to snag Walmart stock for the long haul.
As of this writing, Aaron Levitt was long AMZN stock.
