It is beyond doubt that the brick and mortar retailers have lost a good chunk of their glory in the past decade because of the advent of e-commerce. The convenience brought aboard by e-retailers has pleased customers and the amazing discounts/coupons etc. gimmicks used by these e-commerce companies has really transformed the shopping experience. One of the brick and mortar companies that has seen a huge decline in value in the past quarter is Walmart (WMT, Financial). From wage-related controversies to declining comps, Walmart has truly been having a rough patch. However, the third quarter results reported by the retail giant have come as a breather for investors. Maybe that’s the reason that the stock traded up approximately 5 percent after the results were announced.
Overview of results
For the third quarter, Walmart reported third quarter diluted earnings per share from continuing operations (EPS) of $1.15, within guidance of $1.10 to $1.20. This compared to last year's $1.14. Walmart U.S. comp sales increased 0.5 percent for the 13-week period ended Oct. 31, 2014. Walmart U.S. net sales increased $2.3 billion, or 3.4 percent, to approximately $70.0 billion. The consolidated net sales increased $3.2 billion to $118.1 billion. For Sam’s club, the operating income grew by 12 percent to $493 million achieved on the back of stronger fuel sales. In fact, the management is positive that the lower fuel prices will be favourable to fuel sales in the fourth quarter.
While things are starting to look good, the best reading parameter that I took away from the earnings call was an increase in U.S comps. After nearly two years of falling same-store sales, the company finally saw an increase during the quarter of 0.5%, compared to a 0.4% decline last year. The main drivers for growth here were a 5.5% increase from stores with the "Neighborhood Market" format. Basically a fall in gasoline prices and improvement in economic parameters made Walmart realize that customers were spending better. Therefore, in a bid to take advantage of this opportunity, the company adjusted its pricing in order to provide better savings to these customers. The sales increases in Neighborhood Market pharmacy and strong growth in consumables spurred positive comps.
The dual strategy
Talking about pricing, Walmart has finally made a move that many were expecting to come soon. In order to thwart competition from internet rivals especially Amazon (AMZN, Financial), the world’s largest retailer has made official a price matching offer against e-retailers. Greg Foran, Walmart’s chief executive for the United States, said the offer was already common at many of the company’s 4300 domestic stores. It is important to understand that while such a strategy will definitely attract attention and traffic but the risk is also high. The risk in this situation is that a strategy like this will further eat into the already shrinking margins of the company and analysts are not sure if the brick and mortar retailers are in a position to endure margin cuts.
The good part however, is Walmart’s two form strategy. This is to say that the company is not only limiting itself to price-matching strategy in order to combat the e-retailers. Besides employing this and other like strategies, the company is also riding high on its e-commerce business. In the current quarter, Walmart’s e-commerce business expanded by 21% year-over-year. Foran said Walmart has invested heavily in online shopping and digital initiatives, particularly large-format superstores.
Black Friday prep
Following Best Buy and Target's Black Friday unveilings on Tuesday, Walmart on Wednesday revealed its plans for the busy Thanksgiving weekend. Similar to its two Minnesota-based rivals Walmart has a number of noteworthy deals in electronics, though it has decided to break its Black Friday into three separate "events" beginning Thanksgiving night. The company announced this week that Black Friday deals will begin online early on Thanksgiving and extend over a 5-day period into the first week of December.
"Black Friday has become Black Friday week," Duncan Mac Naughton, Walmart's chief merchandising officer, said in the statement. "Our customers want to shop when they want to shop so we're trying to expand the times and product availability with them."
While this is great news for shoppers, it is an equally significant news for the investors because Walmart’s plans to offer deals and big discounts over a five-day period should enhance its overall revenue in the holiday season. Again, as with the price-matching strategy, it might so happen that the company could see heavier pressure on margins and therefore, investors need to cautious and follow reports released after the Black Friday sales.
Takeaway
In the entire article, I have tried to convey to the readers and prospective investors that Walmart is returning to the track where it had been absent from, for a while. However, if you ask if this is the correct time to invest in the company then I would answer in negative. This is because the company has just started to get back to a growth trajectory and while I praise the strategies employed by it, they are highly risky. So, it will be a prudent decision to wait for the holiday season to get over, take a stock of numbers post that and then invest in Walmart.
