Investors aren’t an easy bunch to please these days, especially investors with retail holdings who’ve had a rough go of things lately.
Case in point: Walmart beat on earnings and revenue, saw same-store sales grow and online sales explode. And yet, at the same time that news broke, Walmart’s stock price promptly dropped 2.5 percent in aftermarket trading on Wall Street.
Things looked good this quarter, but guidance for next quarter failed to thrill.
Walmart’s forecast for Q3, with earnings of $0.90 to $0.98 a share is short the 98 cent median average analysts had been forecasting. Walmart did raise its low-end earnings outlook for the full year to $4.30 a share from $4.20, but not to the high-end estimate of $4.40. Investors were also less than enamored with Walmart’s thinning margins, which were pressured by aggressive price-cutting and expansive investment in eCommerce.
But those investments were the boon to Walmart’s business, and the topic that CEO Doug McMillon was most eager to mention in his call with investors.
“Our strategy is to make every day easier for busy families. To accomplish this, we continue our transformation to become more of a digital enterprise that moves with speed and agility. I’m encouraged by innovation in the business,” McMillon noted, calling out the various improvements to its buy online, pick up in-store brick-and-mortar service — including grocery delivery, in-store pick up discounts and automated order pick-up towers, “where customers can pick up their orders within a matter of minutes.”
“We have tests going on with digital endless aisle shopping, robotics and image analytics to scan aisles … and we’re using machine learning to assist our merchants with pricing,” McMillon said.
The goal, he continued, is to be the brand that knows the needs of its customers and is able to leverage all of its (massive) physical scale and newfound digital acumen under Walmart Digital President and CEO Marc Lore to better meet their desires.
He didn’t mention crushing Amazon, though we all imagine that’s what he was thinking.
By the Numbers
Walmart’s Q2 earnings clocked in at $1.08 a share, slightly ahead of the forecast profit of $1.07 per share by Wall Street. Revenue was $123.36 billion, which again was a narrow beat on the $122.84 billion consensus. Same-store sales managed to climb 1.7 percent, which was in line with analyst expectations.
“This isn’t a blow-away report … it’s a solid report,” Gordon Haskett Analyst Chuck Grom told CNBC’s “Squawk Box.” “I think this number needed to be a little bit better today to drive … [Walmart’s] stock higher.”
And while it may not have felt like a blow-away report, it does seem worth noting that Walmart has reported three straight years of comparable sales growth as of this release. It’s hard to name many other mainstream retailers who can make that claim.
The most eye-catching number, however, was in eCommerce growth.
Walmart’s online sales grew 60 percent year over year in the second quarter, which ended on July 31. It was a big outpace on the industry standard but slower than the 63 percent growth it showed during Q1 (though still well ahead of the 25 percent it logged during Q4 2016). Walmart said most of the growth had come from its own online business and not the acquisitions it has made in the past year.
“They [customers] love not having to pay a membership fee to get Walmart’s free two-day shipping on millions of items. And we’re seeing a nice increase in customers receiving discounts for picking up non-store items at their local stores. Marc, Greg and their teams continue to make good progress in driving innovative solutions across the business and providing the seamless shopping experience customers’ desire,” McMillon noted.
As for the numbers that were less loved, gross margins were down 11 basis points at 25 percent, including a five basis point decline in the United States, compared with analysts’ expectations of 25.22 percent.
Operating margins fell to 4.9 percent from 5.1 percent. In the U.S., brick-and-mortar operating expenses rose 3.9 percent.
The Bigger Picture
“We believe that we’re uniquely positioned to grow and delight customers by providing the seamless shopping experience they desire. Having stores within 10 miles of approximately 90 percent of the U.S. population allows us to serve customers in ways that are most convenient for them,” McMillon said of Walmart’s path forward.
He noted that online grocery is already in 900 U.S. locations and on track to be rolled out internationally. Apart from giving grocery a digital upgrade — and incorporating features like Easy Reorder to make it easy for customers to grab repeat items — Walmart is also going after grocery the good old-fashioned way: with discounts. Walmart has also been cutting grocery prices, which is a drain on margin, but a smart one for Walmart to take on, according to analysts.
“One of the particular areas of success for Walmart is grocery,” GlobalData Retail Managing Director Neil Saunders wrote in a note to clients. “Our data show continued gains in customer share, even in areas where discounters like ALDI have expanded … [Walmart] is one of the few firms that have the firepower to cope with the push toward compressed prices and margins.”
Walmart is ready to start using all that firepower across a lot of channels, as it tries to consolidate and build its brand out to increasingly digital consumers — and to take on Amazon. It’s been an expensive run, but the numbers show it’s been well worth the effort: Customers keep coming to Walmart.
“Retail is constantly evolving, and it’s critical that we move even faster as the customer and competitive landscape continue to change,” McMillon noted.