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Walmart is ‘becoming almost boring’ with how well it’s performing: analyst

Moody’s Charles O’Shea joins Yahoo Finance Live to discuss Tuesday morning’s retail earnings. As for Walmart, O’Shea sees no real areas of concern, and following its previous blowout quarter, the company is “becoming almost boring with how well they're performing.”

Video Transcript

JULIE HYMAN: Let's talk more about the Walmart numbers, as well as some of the other retailers that reported this morning. We bring in Charles O'Shea. He is Moody's Vice President and Senior Credit Officer. And he analyzes the debt of many of these retail companies.

Charlie, thanks for being here. These Walmart numbers, pretty impressive for a company this size. And yes, a little bit of slowing momentum, perhaps, over the prior quarter. But still when you look at those e-commerce sales in particular, you know, Emily mentioned that the shares are down, and it perhaps has to do with that inventory management. Is that an area of concern for you? And indeed, are there any big areas of concern for you when it comes to Walmart?

CHARLES O'SHEA: No real areas of concern here. This is a blowout quarter. Like, Q2 was a blowout quarter. The company is becoming almost boring with how well they're performing. And that's been going on for a few years now since the investment period started. I think that when you start talking about inventory is an issue, it's the companies issue, but it's also a nice problem to have, because you've got accelerating demand for a lot of key product categories.

Now it's on the backs of the vendors to provide those products to the company. Walmart is likely the most important customer for any one of its vendors. And if Walmart is going to have trouble with N stocks to the extent that Brett decides to call it out on an earnings call, then I wonder what that means for everybody else, because again, if you're xyz supplier, you want to keep the guys in Bentonville as happy as possible, because you cherish that relationship.

So if Walmart's going to have difficulty, someone else will as well. And that may end up proving beneficial from a price perspective, because you don't have to clear as much inventory. You don't to be as promotional.

BRIAN SOZZI: Charlie, how brutal will the holiday season be for the likes of Kohl's, same store sales down about 13.3% in the most recent quarter, but also Macy's. When I look at Walmart, I look at Home Depot, those numbers tell me shoppers are consolidating their trips during the pandemic.

They may be visiting stores less, but they want to go to these big box stores, get all the shopping done in one location, and they don't want to go to Kohl's. They could care less about Kohl's.

CHARLES O'SHEA: Brian, that's a really good point. I think we saw that during the pandemic. It's continuing right now, where the stores that were open were able to engender a lot of loyalty from the customers that ended up shifting over. And that loyalty is going to be tough to break. And there were a lot of folks that had probably not been in a Walmart store in an awfully long time. And the experience is a lot different today than it was maybe five, seven years ago.

The stores are a lot fresher. They're more shopable. The merchandise is a little bit better. And I think that's going to continue. And I think you'll see that at the, quote, unquote, barbell of retail, where you've got, you know, the guys at the top, the Walmarts, Targets, Costcos, Best Buys, Amazon.

The off-priced guys that did not have the benefit of being open, but are now open and are going gangbusters from what I understand, and then at the other end of the spectrum, you've got you know the struggling high yield retailers. And then stuck in the middle are the retailers that weren't open, because they were not deemed essential. And they lost customers, and they lost relationships.

And I think that's the important thing to focus on going forward, is Walmart picked up a lot of shoppers. There's no question. So has Target. How many of them are going to stay? And if they stay, what's the impact going to be on the retailers from which they came? And that's going to be a big issue going forward.

- And Charlie, you mentioned kind of the way that people are changing their habits. Average ticket size is up. People are going to the store less. Another part of that is it seems that the hybrid model, what we've heard about for a decade from these retailers, is actually being born out. You look at Walmarts comps, they're up 640 basis points. Well, 570 of that is coming from e-commerce, which includes those buy online, pickup in-store type customers.

Doug McMillon is saying in his comments this behavior is not going to change. Would you agree with that assessment, particularly as we talk about this barbelling of retailers? The companies with the resources to make this work seem to actually be pulling off the strategy that had been kind of so long touted as the next big thing.

CHARLES O'SHEA: Yeah, we've-- our team at Moody's, I think, was really early to recognize this. Almost 10 years ago, we were publishing research about the importance of brick and mortar in an online model. And I think we've seen that bear out. We saw it bearing out before the pandemic when you had Walmart running 35%, 40% online sales growth year over year. And the pandemic has just illuminated that and accelerated it.

But we've seen what buy online, pickup in store, the power of buy online, pick up in-store. And that's been a model that's been around for well over a decade. And the retailers that embraced it and retailers that had the flexibility to expand their retail network, as well as build an online presence, and again, there is the barbell. You've got the financial flexibility and the money to be able to do it, versus those that don't have the money, and they can't do it.

And five years ago, I can remember in October, and I think Brian remembers this as well, when Walmart made its announcement that we're going to take three or four years worth of serious pain here to develop our online business and improve our store base. And the stock got crushed. It went down 10% in minutes.

That strategy is burying itself out. Best Buy has done the same thing. Target has done the same thing. Costco and BJ's, which you would not seem to think would be big online players, have exploded with their online businesses during the pandemic. And that's not going to go away. Stores are important. You can ship from them. And customers can pick up merchandise that they choose.