By Neil Saunders
While the growth figures on Walmart’s top line may not be stellar, they nonetheless indicate that the world’s largest retailer is still capable of eking out growth. They also stand in marked contrast to the more negative figures from rival mass merchant and department store retailers. In short, in a time of change and flux in retail, Walmart is still more than holding its own.
In a time of change and flux in retail, Walmart is still more than holding its own. Looking ahead to the holiday period, Walmart has a sound strategy which involves, but goes way beyond, low prices. Initiatives around exclusive merchandise, entertainment in store, and improved customer service align with consumer demand and should serve the company well in its most important quarter.
The main negative spot in the results comes from international performance where sales declined by 4.8%. However, much of this is down to the stronger dollar which is diluting gains made in local currency; when this is excluded, growth on constant currency terms increased by 2.4%. Admittedly this could be better, especially considering the segment includes high growth geographies like China; however, we are encouraged by the fact that international results are now showing signs of sequential improvement.
The other slight negative appears on the bottom line where operating income fell by 10.4% and net income dipped by 8.2%. This deterioration is not much of a surprise given the increases in wages and the new investments in technology. We take the view that profitability decline is a necessary evil over the short term if it allows Walmart to retain its retail prominence. Indeed, we contrast it to Amazon’s acceptance of lower profits in order to drive growth.
That said, Walmart will need to show that its investments are delivering returns, especially on the e-commerce front. There are some early signs of this in these results, especially the progress made on adding some 8 million SKUs to the online offer. The 20.6% growth in e-commerce sales globally (on a constant currency basis) is positive, and we believe that US online growth is now well above the overall market, indicating that Walmart is comfortably adding share. That said, the figures include half a quarter of sales from recently acquired Jet.com, which flatters the results somewhat. Nonetheless, we believe that Walmart is now on much more positive trajectory in terms of both its e-commerce strategy and results.
Away from e-commerce, the US results more generally are good, even if they do show signs of a slight slowdown since last quarter. We take comfort from the fact that Walmart is trending positive in both traffic and average ticket, an indication that it is still pulling in customers in a way that many rivals are struggling to do.
Looking ahead to the holiday period, we believe that Walmart has a sound strategy which involves, but goes way beyond, low prices. Initiatives around exclusive merchandise, entertainment in store, and improved customer service align with consumer demand and should serve the company well in its most important quarter. In our view, Walmart should end its fiscal year on a positive note.
Neil Saunders is CEO of research firm Conlumino.