By Neil Saunders
In terms of sales, this has been a glittering quarter for Walmart with strong uplifts across most parts of the business. In particular, the U.S. division saw comparable sales increase by 4.5%, the strongest outcome in over a decade. International also made a good contribution, with net sales up by a solid 4.0%. All in all, Walmart managed to increase revenue by $4.6 billion over last year.
Consistent merchandising has contributed to Walmart’s high store performance. The retailer’s grocery sales have seen the best comparable uplift in nine years.
However, in terms of profit, this has been a quarter that Walmart would rather forget. Operating income fell by 3.7%, a relatively weak outcome. At the net level, a $4.5 billion loss from the sale of 80% of Walmart Brazil pushed the company into the red by $861 million. Paradoxically, even if it looks bad, the net loss is forgivable, as it is related to essential restructuring as Walmart moves its attention away from peripheral parts of its business. However, the decline in operating profit is more concerning as it reflects ongoing pressures from investing in lower prices, customer service, digital infrastructure, and store refurbishments, as well as increased labor and transportation costs. These pressures are unlikely to dissipate as the year progresses.
As painful as they are, the erosion of profitability and margins are necessary evils. Maintaining a price leadership position as well as ensuring the company is an omnichannel leader are clear priorities that require investment. These investments are being made, and they are delivering growth—a sign that Walmart is securing its future as one of the world’s leading retailers.
More premium brands
E-commerce is accelerating, with sales up by 40% this quarter. Much of this is due to improvements to the website, which is easier to shop, has a much wider assortment, and is now more connected than ever to services like in-store pickup. The addition of more premium brands, including the Lord & Taylor initiative, is starting to have an impact, as there has been a notable increase in the number of higher-income customers visiting the site over the past couple of months. This is exactly the kind of result Walmart needs to achieve if it is to compete more effectively with Amazon.
We are also encouraged by the pace of innovation in the digital space. The trial of automated picking capabilities in New Hampshire and of self-driving vehicles in Arizona are both signs that Walmart is on the front foot when it comes to emerging technologies. Equally, the JetBlack subscription service which allows customers in New York City to order items for same-day delivery by text message has proved popular, and we see significant scope for future growth.
Grocery makes gains
In stores, Walmart is doing well, especially in grocery, where the company had its best comparable uplift in nine years. Gains are being made at the expense of other supermarkets. Players like Albertsons are increasingly losing the battle on price, service. and many other fronts. Too little is said about Walmart’s operational excellence. It is a retailer that is run well and consistently delivers on basics like stock levels, merchandising, and service. That some other retailers are stumbling over these things is to Walmart’s benefit.
Admittedly, all of these numbers have been delivered against the backdrop of a strong economy and a confident consumer. However, Walmart is taking share across a number of categories and is becoming a much more significant player in digital. We remain confident about its future.
Neil Saunders is managing director of research firm GlobalData Retail.