Does Jetblack’s E-Commerce Failure Spell Trouble for Walmart Stock?

Walmart's e-commerce business continues to search for a pathway to profitability

Walmart (NYSE:WMT) just announced that it is shutting down Jetblack on Feb. 21. The high-end service, which launched in May 2018, allowed customers to order products via text. Unfortunately, it didn’t gain enough customers to remain viable. If you own Walmart stock, I don’t think you need to worry. At least, not yet.

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Could this be a sign that Walmart’s e-commerce business initiatives have hit a wall? Or is the Jetblack failure merely a cost of innovation?

Here are my two cents on the subject.

On the Whole, Walmart Stock is a Buy

Before I get into the heart of the matter, I want to say that on balance, I am bullish on Walmart stock. In January, I commended the company for having strong succession plans throughout the organization, which makes the executive departures a manageable affair. You can’t put a price on a deep talent pool.

At the same time, I did say in November that Target (NYSE:TGT) was the better buy heading into the holidays. In hindsight, we know that the Minneapolis-based retailer laid a massive egg in November and December, delivering same-store sales growth of just 1.4% over the critical two-month period, well below the 5.7% gain a year earlier.

Even the standouts sometimes get it wrong. I have no concerns about Target. CEO Brian Cornell has performed miracles since becoming chief executive in 2014.

But as for Walmart, it holds its annual investor day on Feb. 18, and analysts are concerned that Bentonville will also lay an egg when it comes to holiday sales.

“Investor sentiment has turned neutral to negative in recent weeks, given TGT’s Holiday SSS miss (Walmart U.S. & TGT SSS have a 96% correlation over the last eight quarters), continued AMZN overhang with one-day shipping, and what bears view as a lack of ability to continue the beat & raise story, which would likely put a cap on valuation,” Yahoo Finance reported Deutsche Bank analyst Paul Trussell stating recently.

Although disappointing same-store sales growth numbers won’t make Walmart shareholders happy, the more significant concern I have is what Jetblack’s closure says about the retailer’s e-commerce initiatives. 

E-Commerce Losses Widen

Morgan Stanley analyst Simeon Gutman projects that Walmart will have $2.1 billion in operating losses in fiscal 2020, higher by $200 million, or 10.5% year-over-year. Gutman thought the retailer’s operating losses from e-commerce would peak in 2020, but now believes that will happen in 2021.

Yahoo Finance’s Brian Sozzi suggested that because Amazon (NASDAQ:AMZN) is spending billions to make one-day delivery the norm in online retail, Walmart will have to follow suit, which means Gutman’s 2021 breakeven projection could be optimistic. 

However, I do think Walmart can handle losses from its e-commerce business for several more years without blinking an eye, thanks to the strength of its brick-and-mortar locations in the U.S.

In addition, Walmart’s free cash flow for the trailing 12 months is $13.9 billion, leaving plenty of room to absorb any ongoing losses over the next 2-3 years. One note of caution: over the past three years, the company’s free cash flow has fallen by 34% from $20.9 billion in fiscal 2017. I wouldn’t worry too much about this because in fiscal 2019, income was $8.4 billion lower due to losses from the sale of Walmart Brazil and lower market value for its shares in JD.com (NYSE:JD). 

Walmart continues to experiment with its e-commerce business. Thankfully, it has the cash flow to be able to do so. Not every company has this luxury.

Ruomeng Cui, an assistant professor at the Goizueta Business School at Emory University in Atlanta, believes that Walmart has taken the appropriate steps to build its e-commerce business in recent years.

“Walmart has tried many ways to overhaul its online business since 2012. Things Walmart has tried include: buying Bonobos, buying Jet.com, offering “buy online pickup in store” services. The multi-channel strategy is starting to pay off. Personal purchasing experience is showing improvement,” Cui said in an email to InvestorPlace

“Walmart’s e-commerce sales surged 41%, driven by strength in grocery in 2019. Walmart’s sales, online or offline, will grow the moment Walmart starts to improve its grocery. The grocery strategy is tightly tied with Walmart’s corporate strategy and natural strength.”

The Bottom Line On WMT Stock

As Professor Cui stated above, Walmart has tried many different initiatives to grow its e-commerce business in recent years. These initiatives include Jetblack. Naturally, not every strategy a company implements will be successful.

CEO Doug McMillon’s e-commerce strategy might appear to be throwing a bunch of things against the wall to see what sticks. That would be an oversimplification of everything it’s trying to accomplish from its online exploits.

If you’re a Walmart shareholder, you ought to be thankful for failures such as Jetblack. It means McMillon and the rest of its management team aren’t afraid to fail. The more failures you have, the more successes you have.

In my opinion, Jetblack’s failure does not portend bleaker days ahead for its e-commerce business. It does, however, need to show a pathway to profitability within the next 12-24 months. A failure to do that would not be good for Walmart’s stock.      

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


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