What, it’s OK for ginned up investors to heap praise upon money losing IPOs such as Crowdstrike (CRWD), Fiverr (FVRR) and Beyond Meat (BYND) and yet come out firing against the nicely profitable retailer Walmart (WMT) for reportedly losing big bucks online?
Give me a break.
Anyone who has followed Walmart for some time (like yours truly) is keenly aware — keep in mind Walmart does not disclose profits for its online business (though it should) — that the company’s U.S. online business is a money pit as it invests in software, techie human beings and various new services to stay competitive with Amazon (AMZN) and Target (TGT). Walmart has no other choice but to make these investments if it wants to win over time both in the digital realm and its physical stores, which play home to services such as picking up orders placed online.
What’s the alternative? Walmart sells off its online business in pieces to Amazon, Big Lots and Kroger (KR) and just operates thousands of physical stores in a world where foldable cell phones are around the corner. Get real people — that would be destroying value for Walmart shareholders over the long-term.
$1 billion in losses may be conservative
The uproar here on Walmart’s online business’ bottom line stems from a recent story by Vox, which said the U.S. digital business will report a loss of $1 billion this year on $21 billion to $22 billion in sales. A Walmart spokesperson didn’t immediately respond to a request for comment on Vox’s report. But investment bank Morgan Stanley suggested Monday that the loss figure may in fact be conservative.
Morgan Stanley analyst Simeon Gutman estimates Walmart’s U.S. online operations will lose $1.7 billion this year. A year ago, Gutman said Walmart lost $1.4 billion online. Gutman pins the losses on Walmart selling more lower margin consumable items like groceries and toiletries online.
Gutman’s research shows that about 80% of what’s sold on Walmart.com in the U.S. are those less profitable consumable products. Importantly though — and unlike the aforementioned hot IPOs this year — Walmart is well down the path to profitability online.
Gutman points to several factors as to why:
Walmart’s continued focus on building out more online offerings in the higher margin shoes, apparel and hard goods categories.
Walmart now has six e-commerce distribution centers that when combined with in-store pickup/ship from store services for online orders, is bringing down the company’s fulfillment costs.
Walmart has started to cut costs at Jet.com, an online business that it acquired in 2016.
Also critical besides these cost-saving initiatives is that Walmart’s digital efforts —ranging from buy online, ship from store to buy online and pick up in-store — are aiding overall sales.
Walmart’s U.S. same-store sales rose an impressive 3.6% in 2018. This key retail metric — which measures stores open longer than a year — clocked in with 3.4% growth in the first quarter. What’s more, Walmart U.S. saw its operating income grow 5.5% in the first quarter versus 3.3% sales growth for the segment. In Wall Street speak, that’s known as “driving leverage” over the business — always a good sign for a company.
Meanwhile, Walmart’s online sales continue to grow in excess of 30% a quarter.
Walmart has to invest in the future
None of this analysis is akin to us cheerleading Walmart as some form of invincible entity with no faults. Does it probably need to do a better job managing its online costs? Sure, what large company today doesn’t have to get their tech spending under wraps. Should Walmart offer up more disclosure around the financial performance of its online operations given its increasing size and importance to its future? Yes, indeed.
But to shred Walmart for investing in the future of shopping borders on absurd. Round numbers sound great in headlines, but Walmart and countless other retailers have no choice but to invest aggressively in digital.
Not sold on this logic? Then let price be your truth: Dow component Walmart’s stock is up 48% during the past two years where investments online have arguably been their strongest ever. The Dow is only up 24% over that same stretch.
Mr. Market says Walmart is placing the right bets online. So, relax.