Walmart’s bold steps cut profit

Analysts wonder if moves will pay off

Walmart Inc. has spent the past year reshaping its business, making a handful of noteworthy decisions executives believe will set the company up for success over the next generation.

The Bentonville retailer has invested heavily in its U.S. online grocery segment, implementing plans to further expand its curbside pickup service and take a deep dive into delivery with a help of partners.

Walmart has unveiled efforts to attract new shoppers through initiatives like the creation of Allswell, a stand-alone website selling luxury mattresses and bedding. And, of course, it has made bold moves like spending $16 billion to acquire a 77 percent stake in India e-commerce company Flipkart.

Brian Yarbrough, a retail analyst with Edward Jones, said Walmart did what, for the most part, are “great things” as it battles Amazon.com and other competitors. But there’s a notable downside: The investments are cutting into profits and there’s no guarantee Walmart’s spending will lead to a payoff.

“I’m not sure that there’s this pot of gold at the end of the rainbow,” Yarbrough

said. “Anyone today that tells you they know it’s going to be there or anyone tells you they know it’s not going to be isn’t being honest. No one really knows. I don’t think Walmart really knows at this point.”

The uncertainty won’t deter Walmart from celebrating its accomplishments as representatives from around the globe gather across Northwest Arkansas once again for this week’s shareholders events.

The company continues its transformation under Chief Executive Officer Doug McMillon and its progress will be highlighted during the week. For the first time Walmart will hold its business meeting on Wednesday, separating it from the usual star-studded celebration on Friday.

This year’s festivities come on the heels of another solid fiscal year for the retail giant, which landed back atop the Fortune 500 list of largest U.S. companies after reporting $500.3 billion in revenue. But investors are keeping close tabs on the company’s shrinking profits, which have factored into shares of Walmart’s stock sliding about 20 percent since reaching a record high of $109.98 in late January.

Ken Perkins, a retail analyst and president of Retail Metrics LLC, believes the concerns are understandable. But he is convinced the spending is a necessity.

“They have to do it,” Perkins said. “They’ve got the resources to do it. They’re willing to do it. Their shareholders probably don’t like it because it’s clearly cutting into their operating income, but if you want to look long-term and be a global player … I think it’s table stakes to really compete.”

INTERNATIONAL MOVES

Walmart has repeatedly shown it won’t shy away from the fight over the past several months.

The biggest piece of evidence has been the restructuring of its international business, beginning with a pair of attention-grabbing moves that finalized over the past few weeks.

Walmart reconfigured its business strategy in the United Kingdom, opting to merge its Asda business with Sainsbury’s as part of a $10.1 billion deal that was revealed late last month. Walmart is not backing out of the market completely — it will retain a 42 percent stake in the joint venture with its U.K. rival — but the plan is proof of the retailer’s efforts to shift more of its attention, as well as its capital, to international markets where there is a better opportunity for growth.

Walmart then acquired the 77 percent stake in Flipkart as part of the biggest deal in the retailer’s history. It’s a risky move considering the weight on profits.

If the deal closes by the end of the second quarter, it would affect Walmart’s fiscal 2019

earnings per share between 25 and 30 cents. The impact would be about 60 cents next year.

Analysts agree India presents an enormous opportunity. Amazon.com is also investing billions into its business in the country, which has a population of 1.3 billion. But analysts questioned whether Walmart was doing the right thing in spending $16 billion instead of investing more in its domestic fight with the e-commerce giant.

Walmart insists securing a majority stake in Flipkart — though it isn’t profitable and probably won’t be in the near future — was a critical and necessary move.

“We understand the dilution impacts our shareholders and have given that significant thought as we contemplated this investment,” McMillon said. “We understand both the short-term and long-term expectations of our shareholders. We weigh those expectations. We believe this transaction is very important to our company for the future.”

EXTENDING DIGITAL APPEAL

The same urgency has been apparent in Walmart’s quest to grow its digital business in the U.S. under the leadership of e-commerce chief Marc Lore.

Last year, Lore was the rock star during his first shareholders event, which followed Walmart’s $3.3 billion acquisition of his company, Jet.com, earlier that year. In his first few months, Lore introduced initiatives like two-day free shipping and orchestrated acquisitions of e-commerce retailers like Moosejaw and ModCloth.

Not long after shareholders week, the company added more cache by acquiring Bonobos for $310 million and placed its founder, Andy Dunn, in charge of the company’s digital brands.

The moves were largely applauded by Wall Street until the U.S. e-commerce business suffered a hiccup during the fourth quarter. Walmart’s stock fell 10 percent during trading that day. It didn’t shake Walmart’s forecast that it will see sales growth of 40 percent in the current fiscal year, but made investors raise their eyebrows.

Jennifer Bartashus, a senior analyst with Bloomberg Intelligence, said the challenge for Walmart over the next year will be showing investors it can make “great strides” in its U.S. business.

“I think people understand the strategic long-term goal with Flipkart, but it puts a lot more pressure on Marc Lore and the U.S. e-commerce business to get to profitability,” Bartashus said.

Walmart took an important step with e-commerce sales growth rebounding to 33 percent in the first quarter. The company has continued to introduce initiatives intended to scale the business and attract customers who may not typically shop at Walmart with some of its recent digital moves as well.

Walmart created Allswell as a stand-alone website to sell luxury mattresses and bedding. It is opening a Lord & Taylor portal on the redesigned Walmart.com, which features more personalization and dedicated space for key categories like home furnishings and apparel.

Lore said the retailer is also pursuing additional ways to add more premium brands.

“We still don’t have a lot of products and brands that we want to have on the site,” Lore said. “While we’re trying to go direct and establish those relationships ourselves, it also helps to have partners who already have those relationships.”

OMNICHANNEL EMPHASIS

Walmart isn’t forgetting about its core of 4,700 stores and the company has been investing further into initiatives aimed at developing a seamless experience for shoppers. Executives often note customers who shop in stores and online spend twice as much as those who only use one channel.

Walmart announced late last year that it planned to roll out its curbside pickup service to an additional 1,000 locations in fiscal 2018, which will run its total to about 2,100 locations.

In addition, Walmart has decided to take a significant step into grocery delivery. Walmart plans to make the service available from about 800 stores by the end of the year, covering roughly 40 percent of the U.S. population.

There are other order retrieval options expanding as well. Walmart plans to extend its pickup towers to about 700 locations this year. The order vending machines are currently at about 200 locations.

Greg Foran, Walmart’s U.S. stores chief, said the retailer is “comfortable” with its U.S. strategy, producing a samestore sales increase of 2.1 percent and traffic growth of 0.8 percent in the quarter.

“Over time, customers are going to have the choice of coming into a Walmart store and shopping and getting fantastic prices, ordering online and coming and picking it up and getting fantastic prices, or having it delivered to their home,” Foran said. “We think that’s a pretty compelling offer.”

Foran acknowledged the company still has work to do, but Walmart will celebrate its accomplishments and offer a glimpse of future plans over the coming quarters when employees and shareholders gather.

But Edward Jones’ Yarbrough believes the mood is different from that of a year ago, when Walmart was optimistic about its efforts to build the digital business.

Yarbrough said there are questions about Walmart’s ability to make the business profitable that may not be answered “for quite some time.

“Everyone was very, very bullish after the Jet.com [acquisition] and the e-commerce growth that they were seeing last year,” Yarbrough said. “I think, today, people are a lot more skeptical.”