Key Takeaways from Walmart’s Q1 Earnings

Playing offense against Amazon

Author: Andria Cheng

May 18, 2017

The distance between Walmart, already the largest US retailer, and its many struggling brick-and-mortar counterparts is growing wider.

Walmart US, with $308 billion in sales last fiscal year and 64% of parent Wal-Mart Stores Inc.’s total business, on Thursday reported a 1.4% Q1 comparable sales gain, its 11th straight increase. 

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That’s a sharp contrast with rival Target’s fourth straight same-store sales decline, reported on Wednesday. Walmart’s sales performance has beat both Target and the overall retail sector for four straight quarters, after lagging for prior seven quarters, according to Retail Metrics.

Here are some key takeaways from Walmart results:

Walmart’s move to cut prices to make sure it has the lowest price on a basket of goods such as groceries has paid off. While many brick-and-mortar retailers including Target are reporting declining visits, customers are going to Walmart stores more, driving traffic up by 1.5%, its 10th straight quarterly gain. The grocery business, representing both food and CPG items and 56% of Walmart’s business last year, posted a low-single-digit Q1 increase. In fact, Walmart CFO Brett Biggs said in a recorded call food categories posted the highest comparable sales performance in more than three years.

“Our (price) checks still show widening gaps” between Walmart and other retailers, said Jefferies analyst Dan Binder, adding Walmart continued to “make price investments” in some markets this quarter with grocery remaining the key area of focus, and most recently, clothing.

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Target, on the other hand, said on Wednesday that traffic and sales have been hurt by consumer perceptions that it doesn't offer competitive value on  grocery and CPG items.

Walmart is gaining in ecommerce. The retailer's US ecommerce sales rose 63% in Q1, which Cowen & Co. analyst Oliver Chen said was the “highest in years.” The online sales increase not only contributed more than half of the US comparable sales increase, it also outpaced the 23.5% Q1 increase at Amazon’s North American unit, and Target’s 22% ecommerce gain. And don’t think the gain is because of Walmart’s $3 billion purchase of last year and other smaller sites like ModCloth and Moosejaw: the company said its online sales gain are mostly organic coming from

“The acquisitions have received a lot of attention but our plan in e-commerce is not to buy our way to success,” said Doug McMillon, Wal-Mart’s President and CEO, in the earnings call. “The majority of our growth is and will be organic. The acquisitions are helping us speed some things up.”

Walmart is serious about Amazon. In just one year, has increased both first and third party items to 50 million from 10 million a year earlier, McMillon said, adding the acquisitions of sites like ShoeBuy and ModCloth will help it acquire “critical category experience” in more profitable categories like shoes and apparel. 

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A New Online Discount That Could Spur Store Traffic

The company also has introduced free two-day shipping without requiring customers to pay a membership fee and in April rolled out Pickup Discount to give its price-conscious customers discounts on some online-only orders when they choose to pick them up in stores, taking advantage of the fact its nearly 5,000 stores are located within 10 miles of nearly 90% of the US population. By doing that, it also allows Walmart to potentially get a leg up over Amazon and cut the so-called “last-mile” delivery costs, which Walmart said represents the lion’s share of shipping costs to customers’ homes.

Excluding Amazon and Walmart, there is still about 70% of e-commerce share up for grabs.

Walmart “is no longer playing defense against (Amazon) but is now playing offense,” said Barclays analyst Karen Short in a note in April, when she said Walmart is her top pick in her retail coverage universe. “Walmart has an omnipresence. Amazon does not….Excluding Amazon and Walmart, there is still about 70% of e-commerce share up for grabs.”

That bullish sentiment hasn’t changed. She said in a separate note Thursday that Walmart is “well positioned to adapt to various competitive challenges” from Amazon and other discounters.

Walmart’s omnichannel efforts to marry its store and online strengths also can be seen in its latest iteration of the “next-gen test stores,” where Walmart is allowing shoppers to do drive-through pickup not just on grocery items that are currently in place at about 670 stores, but also prescription and other orders. The two test stores it features also have interactive kiosks that allow shoppers to order online-only items and pay with the other store items at checkout.