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Do Walmart Investors Need to Worry About Its Digital Business?

Motley Fool Staff, The Motley Fool

Walmart (NYSE: WMT) has invested billions in its digital business in an effort to catch up with Amazon and other online competitors.

But last month, a whistleblower accused the company of overstating its digital sales numbers, claims the company has denied.

In this segment from Industry Focus: Consumer Goods, Vincent Shen is joined by Motley Fool contributor Daniel Kline to look at the latest headlines from Walmart. They break down the company's digital business, including the poor market reception to fourth quarter results.

A full transcript follows the video.

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This video was recorded on March 22, 2018.

Vincent Shen: Our first story for today goes back to Walmart. I've been pretty much actively trying to avoid talking about this company for a while now, but I'm giving in today because there have been several recent developments that I think deserve our attention. First, a little bit of bad news. A whistleblower has accused Walmart of using deceptive practices like delaying customer returns and collecting inflated commissions from vendors in their online marketplace to juice the growth and results from its e-commerce business. That raised some eyebrows here at Fool HQ, given how important digital growth has been to the bull case for this company. What are your thoughts here, Dan?

Dan Kline: It does, but let's put this into context. This is a single person who is a laid-off employee making these accusations. That doesn't automatically make them untrue, but we haven't seen any vendors come forward and say they were charged inflated fees. We haven't seen any customers say they've had issues with returns. Even the amount of returns alleged to be improper was about $7 million, which in the terms of the Walmart digital business, is kind of like me forgetting that I owed you $1.

Shen: Yes, I understand that.

Kline: [laughs] It's not a huge amount of money. The bigger concern here is, how healthy is Walmart's digital business? In the last quarter, the growth slowed. They've been having 50% quarter-over-quarter growth, and it slowed to, was it 20% in the most recent quarter?

Shen: About 23%.

Kline: 23% and people got very panicked about that, even though overall sales increased. And I think some of the big picture is being mixed here, that the Walmart digital effort is really an omnichannel effort. And if it drives more people to stores instead of driving more people to buy online, as long as overall sales go up, it really doesn't matter.

Shen: OK. I will stress that these are allegations. Walmart has denied these allegations, no surprise there.

Kline: Vehemently.

Shen: And there's a lawsuit that will have to work its way through the courts before we know more. But you mentioned some of the reasons and the points behind why I wanted to bring this up. One, we know that Walmart is pretty laser-focused on building out its digital channel since they acquired Jet.com and handed the reins over for e-commerce to Marc Lore. And all of that is part of the strategy to not only better compete with Amazon but also just gain market share in general in this channel.

And two, as you mentioned, the stock has taken a beating in the past month. I think it's down over 15% since the company reported fourth quarter earnings. And top line, same-store sales results were strong, but because that digital growth came in at that 23% year over year that we talked about, a deceleration from the approximately 50% levels that Walmart reported for most of 2017, a lot of investors dinged the stock for that slowdown. I think that's a clear indicator, at least, of how much weight and value the market has placed on sustainable and robust growth in the e-commerce for Walmart.

Kline: And I think the market is looking at this incorrectly. When you look at an omnichannel model, you might be standing in a store and place a digital order that will be brought to your house. You might be at home and place an order that you pick up in your store. You might get it home, not like it, and have it shipped back from your door or bring it back to a store. The definition of where a sale counts is where the transaction occurs. So, if you buy it online and pick it up in store, it's still a digital sale.

But, again, I go to the importance of being the overall sales number. Walmart is building out its supply chain. It's building out its ability to have what you want where you want it. And it's also forcing people or trying to train people to buy certain items in stores. There's actually lower prices on certain hard-to-ship items if you physically go to a store. That's trying to get you to do that. So the whole story isn't digital sales. This isn't Amazon reporting slowing growth where really their only business, at least as a retailer, is digital sales. With Walmart, it's easy to pick apart these numbers, but again, I think this is market overreaction.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel B. Kline has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.