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How Walmart Is Fighting Back Against Amazon

GuruFocus.com
·4 min read

- By Panos Mourdoukoutas

Walmart Inc. (NYSE:WMT) has been catching up with Amazon.com Inc. (NASDAQ:AMZN), as evidenced by a string of quarterly reports, including one this week, that confirm strong online sales growth.

On Tuesday, the retail giant reported a 79% increase in e-commerce sales for its own name stores and a 49% gain in online sales for Sam's Club stores. Earnings climbed 17% to $1.34 a share, with revenue rising 5.2% and U.S. comps climbing 6.4%.


That's a big change from a decade ago, when Walmart's earnings and revenue growth stalled while Amazon lured shoppers to its site.

But the retail giant fought back. It paid big bucks to recruit software developers and acquired online retailers to expand its e-commerce scale and scope to match Amazon's pricing and convenience.

Walmart has also leveraged its extensive store network to speed up online orders by shipping from its stores rather than from remote warehouses, as has been the case with Amazon.

Providing shoppers with the choice to place orders online and pick up merchandise at local stores also helps customers save time and avoid shipping fees.

Simply put, Walmart "turned the tables" on Amazon by taking advantage of what the e-commerce giant was missing: retail stores.

"Walmart has a 5K location head start of Amazon in warehousing and distribution centers," Gregory Ng, CEO at Brooks Bell, a web optimization consultancy firm, said. "Not to mention, Walmart is sitting on a gold mine of data on its in-store experience (think about the customers who come to them for optics care, their pharmaceutical needs, and weekly groceries). Knowing how often you buy a gallon of milk, which kind and when is incredibly valuable info as a retailer. Combine that with its e-commerce business (that's been paved by Amazon), and it's ahead of the curve."

That's why Ng is optimistic about Walmart's comeback.

"Amazon may have led the revolution in getting general consumers comfortable with ordering online for household items, even food," he added. "But Walmart's investment to build their test and learn methodologies and their digital properties will position them to rule. They have the distribution footprint that can be even more relevant to the needs of their customers."

Wall Street has taken notice, helping Walmart's shares climb 150% over the last five years.

Still, Walmart has yet to catch up with Amazon in most key financial performance metrics:

Company

Walmart

Amazon

3-year Revenue Growth (%)

5.4

25.6

3-year EBITDA Growth (%)

3.6

42.2

Current Operating Margin (%)

3.93

5.72

Average Annual Total Return (2010-20)

13.71

34.75

Market Price

$150.4

$3,142.4

Intrinsic Value

$115.41

$2,835.4



Company

ROIC

WACC

ROIC-WACC (Economic profit)

Walmart

8.73%

3.39%

5.34%

Amazon

11.37%

9.48%

1.89%



That's why Walmart's big run on Wall Street may be over, equity analyst John Zolidis wrote in a note following the retail giant's financial report on Tuesday.

"But the retail giant's run may be coming to an end, according to equity analyst," he said. "WMT results were beats across the board on comps, GM, and EPS. However, at the end of the day, it's only producing mid-teens EPS growth when demand for food-at-home has never been greater. As a reminder, WMT is 55% grocery. Grocery comps were up MSD during the quarter, below the industry growth that we've seen. "

Then there's a 14% drop in-store traffic, which worries Zolidis.

"This is the same decline experienced in the second quarter even though the average ticket (from stock-up/ trip consolidation) eased to +24% from +27%," he wrote. "There are many factors affecting the traffic/ ticket dynamic, but given the company's omnichannel capabilities, we would have thought traffic might start to come back. "

That's why he's bearish on Walmart's stock at this point.

Disclosure: I own shares of Amazon.

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This article first appeared on GuruFocus.