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Walmart Proves It Can Compete on Amazon's Turf

Walmart Inc. (NYSE:WMT) posted strong quarterly results last week, with, most notably, a robust comparable sales increase of 3.2%, capping off five consecutive quarterly gains. Other indicators demonstrate the company is taking market share away from competitors, whose e-commerce efforts are languishing.

Walmart's online sales rose by an impressive 41% from the same period last year. That increase is almost double Amazon's (NASDAQ:AMZN) third-quarter online sales growth of 21%. The big-box retailer's strong results were buoyed by continuously strong consumer spending, raising hopes for other retailers for a strong holiday shopping season.

The Bentonville, Arkansas-based company was one of the first chain retail stores that aggressively built up its e-commerce capabilities to mesh with changing consumer shopping habits, while similar efforts by its competitors to establish an online footprint were tepid. Walmart's 41% gain in e-commerce sales, up from the second quarter's 37%, offers compelling evidence that the company is reaping the fruits of its labor.

Some investors, however, viewed the sizeable online sales increase as a mixed blessing, as many were anticipating a broader product mix other than primarily foodstuffs. In this regard, their fears are not unfounded as grocery sales account for 56% of the company's total revenue. Walmart CEO Doug McMillon acknowledged these concerns during a conference call with analysts.

"Our strength is being driven by food, which is good, but we need even more progress on Walmart.com with general merchandise," he said. "We're mixing the business out better to achieve better margin rates, but there is more work to do."

Nonetheless, of all the brick-and-mortar retailers, Walmart is the one that has been giving Amazon a run for its money in overall online sales, and is keeping pace with it in grocery sales rate of growth.

Indeed, Walmart is taking Amazon's recent attempts at upending the traditional grocery business head-on. Amazon recently offered its Prime members fast delivery service as well as other perks, including discounts on in-store purchases of its other products. In response, Walmart is aggressively pushing its new grocery membership that offers unlimited delivery for a fee, even going so far as to provide a novel service that will deliver groceries directly to customers' refrigerators.

Walmart posted net income of $3.29 billion for its latest quarter, compared with $1.71 billion in the year-ago quarter. Total revenue was $128 billion, up over the $124.9 billion recorded in the previous year. At $29 billion, international sales accounted for approximately 23% of total revenue. Factoring in losses from its JD.com e-commerce venture, adjusted earnings per share hit $1.16, nonetheless still beating the Street's consensus of $1.09 a share.

Walmart's success in competing with e-commerce giant Amazon confirms that for the past two years, the traditional retail store shakeout is starting to be a two-tier affair. Some traditional retailers are reaping the benefits of massive shifts to their staid business models; other stores that have not yet adopted quickly enough, or, like J.C. Penney (NYSE:JCP), have yet to implement a viable business strategy, are floundering.

The recent disappointing quarterly results of other traditional retailers would seem to buttress this contention. Last week, department stores Kohl's (NYSE:KSS) and J.C. Penney reported weak sales for their latest quarter, while Amazon and TJX Companies (NYSE:TJX) both posted strong gains. Macy's (NYSE:M) saw comparable sales at its stores drop by 3.5%.

Analysts are rightly concerned to question the long-term viability of the retailers who are currently struggling, despite the tailwinds of strong consumer spending.

Disclosure: I have no position in any of the securities referenced in this article.

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This article first appeared on GuruFocus.