Walmart has taken a pounding this year. The stock is down 8.4% even though it has seen solid earnings performance. The reason why? Shares first got beat up early in 2018 when investors worried its digital strategy wasn’t taking hold. Then in the middle of the year worries about margins cropped up. Finally, in November, shares saw losses even though Walmart beat earnings and raised payouts. Interestingly, the shares were a counterpoint to the rest of retail, which saw gains for much of the year.
FINSUM: We think Walmart is a great buy. It has good same store sales momentum and its ecommerce operation is growing rapidly. This seems like a good buying opportunity to us, especially as the brand sells consumer staples, which will hold up even in an economic downturn.
Amazon may get all the fan fare, but Walmart is lurking. For many years, Amazon was considered so far ahead of rivals in ecommerce, that anyone catching up with it was considered unlikely. And while Amazon is still the undisputed leader, that view is changing. Walmart’s most recent earnings show that its commitment to ecommerce is thriving. Walmart is leveraging its food business particularly well in transforming its operation. The company is already operating click-and-collect food businesses in 600 US locations. Amazon only has such operations in 22 cities, via Whole Foods.
FINSUM: Both companies seem to want to be the “everything” of 21st century retail, but they are going about it from different angles. Amazon is going from ecommerce into groceries, and Walmart is doing the opposite.
For a long time, Walmart was one of the greatest growth stocks in history, growing from a small regional company to the largest retail chain in the nation. However, growth has evaded it for some time, and its quick expansion ended about 20 years ago. That may all be about to change, however. Walmart’s ecommerce operation is really taking off, growing at a 40% clip, at the same time as its in-store sales are rising at their fastest pace in a decade. Walmart is already the fourth largest online retailer in the US, but the stock has not given full credit to how well the company is doing, creating an opportunity for investors.
FINSUM: Walmart’s acquisition of Jet in 2016 was a smart one, and it has shown good leadership in ecommerce. We suspect the stock has a few years of good growth coming.
The retail sector has been in tumult for years, but the struggles have intensified over the last few years as ecommerce has accelerated and physical stores are under pressure. The big winner so far has been Amazon, but lately, Walmart has been pushing back with a greatly improved and expanded ecommerce offering. Now, Walmart may be able to grab more market share in the US retail market by undercutting other retailers on price. Walmart has been lowering prices and is now 3-5% below other retailers like Dollar General, Kroger, and Big Lots for the same items. Many of the items are so-called “traffic-driving”.
FINSUM: We can comment on this from personal experience. It is remarkable, especially in rural America, how much minor price differences can entice consumers to drive 10+ extra miles to the store which is perceived as cheaper. We think these price differences will be material.
While the acquisition of Whole Foods by Amazon put a great deal of fear into other grocers and investors, things have quieted down since then. Now, the fears appear to be warranted as Amazon’s plan is becoming apparent. Amazon will offer Whole Foods groceries online at the same prices as in store, with free delivery for Prime Now members. The strategy will make it very hard for other grocers, like Kroger, to compete, as Amazon will likely lose money on every transaction. Kroger, and Walmart, are both launching their own delivery programs, but both will cost between $11.95 and $9.95, making them less competitive for short shopping trips.
FINSUM: Walmart can afford to lose money to grab market share, as can Amazon, but Kroger and other small grocers may be very vulnerable.