The old guard brick-and-mortar retail industry is under duress. In the first half of 2020, 18 retailers filed for Chapter 11 bankruptcy protection while the number of store closures hit another record. All the while, Walmart (NYSE:WMT) is thriving. WMT stock is up 18.55% year-to-date, topping the S&P Retail Select Industry Index by 300 basis points.
One point underscoring Walmart’s sturdiness, and it’s a valid one, is the retailer’s recent announcement that it’s boosting pay for 165,000 associates. That a time when so many companies are looking to cut costs anyway they can, including massive layoffs.
There’s more to like with WMT stock and little of it has to do with the predictable thesis involving the upcoming holiday shopping season. For example, the largest U.S. retailer recently sold its Asda unit, generating $8.8 billion and a sought-after exit from Europe.
Walmart’s market capitalization as of Oct. 7 is $406.58 billion. So, $8.8 billion doesn’t appear to move the needle. But the proceeds from the Asda sale provide capital to bolster its position in more lucrative international markets and e-commerce.
Winning With WMT Stock
There was a time when it appeared Walmart would be left in the dust by Amazon (NASDAQ:AMZN) and the online retail movement. These days, the Arkansas-based company is major e-commerce player and one of the most credible competitors to Amazon in this arena. Walmart made a series of shrewd moves paving the way for it to go from online afterthought to e-commerce juggernaut.
“While we believe its days of material store count growth have passed, Walmart has redirected capital toward development of its global omnichannel capabilities (organically and through acquisitions),” according to Morningstar. “We view its efforts positively and suspect it has built an infrastructure that should support digital percentage growth well into the double-digits for years to come.”
Still, Walmart’s online operation loses money. That’s not overly concerning yet for a couple of reasons. First, essentially all of Amazon’s profit is derived from Amazon Web Services (AWS), it’s cloud computing business. Second, Walmart leadership acknowledges the need to move into higher margin categories online. This is a critical step toward making its online retail business profitable.
Other Cards to Play
Additionally, Walmart is usually its suppliers’ largest customer, meaning it can leverage scale to suppress costs. That’s crucial because sales aren’t the issue. Walmart’s online revenue nearly doubled because of the novel coronavirus pandemic. Costs are. And, if the company can manage those while realizing benefits from higher-margin areas, online retail should eventually become a material earnings driver.
Walmart has other cards to play in the online space. It’s willing to tussle with Amazon Prime with Walmart+, a same-day grocery delivery service that carries a $98 annual subscription fee. Walmart+ isn’t live nationwide, but it’s been tested in some markets last year. Company officials were encouraged by the results.
Additionally, the company is redesigning its stores to integrate seamlessly with its mobile app. It isnot just spatial design. There’s a fintech element here, too. Customers can scan items with their phones, paying as they go while avoiding a traditional checkout experience. These are customer retention moves and could be meaningful. In online retail, customers face no switching costs, so it’s on retailers to drive loyalty.
Still Growth to Be Had
What’s attractive about Walmart’s standing in the e-commerce space is that those sales accounted for just 7% of 2020 revenue. But in dollar terms that works out to a massive $28 billion. This indicates the retailer can affect scale to increase market share.
This is success the company can replicate in fast-growing, ex-US markets, such as India. Investors can grab growth at a reasonable price as the price-to-sales ratio on WMT stock is just 0.74x.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.
