Walmart Inc (WMT, Financial) has investment appeal, in my view, even after its 22% stock price rise in the past year.
The retailer is investing in its website, diversifying into new markets and implementing new technology to widen its economic moat.
Online investment
The company is investing in its e-commerce services. For example, it is increasing the number of its stores that offer same-day grocery pickup so that 3,100 of its locations will offer the service by the end of fiscal 2020. It also expects to increase the availability of its same-day grocery delivery to 1,600 stores within the same timeframe. This could improve the retailer’s competitive position in the e-commerce market and widen its appeal to a broader range of consumers who are increasingly prioritizing convenience in their shopping habits.
Walmart launched its In-Home Deliver service in the fiscal 2020 third quarter. It offers over one million of its U.S. customers the facility to have their online grocery orders delivered all the way into their refrigerators. This could improve the shopping experiences of the company’s customers and help to differentiate its service from those of its sector peers.
Growth opportunities
The business opened its first Walmart Health center in the third quarter. It partners with local healthcare providers to offer a range of services, including primary care and dental, to the local community. Its low and transparent pricing has resonated with local consumers, according to the company’s third quarter update.
Walmart plans to open its second health center in the fourth quarter, and has plans to expand its number of health center locations in the upcoming quarters. They could diversify the business into new markets and enable the company to sell its health services to its existing retail customers.
In addition, the retailer is implementing new technology to help its staff to work more efficiently. For example, it introduced its Ask Sam mobile app in the third quarter to help its staff members to locate specific items in its Sam’s Club stores. This contributed to an increase in its Sam’s Club membership numbers and renewal rates in the third quarter.
Walmart is also introducing a larger number of private brands across its stores. They could help to differentiate it from sector peers, and may offer higher margins that boost the company’s profitability.
Potential challenges
The company’s third quarter financial performance in some of its international markets was disappointing. For example, it experienced weak demand from its customers in the UK due partially to Brexit, while civil unrest in Chile had a negative impact on its business there.
These two trends could continue during 2020, since the UK is now negotiating trade deals with the EU and other countries which could cause consumer confidence to remain pessimistic in upcoming quarters. Additionally, the retailer could experience weaker demand in China due to the ongoing impact of the new coronavirus on consumer sales in the region.
The company is investing in its international businesses to improve their financial prospects. For example, it launched a grocery pickup and delivery service in Canada in the third quarter that could broaden its appeal to a wider range of consumers.
It also opened two new distribution centers in Mexico and expanded the range of products sold through its Mexican website. They contributed to a 65% rise in the company’s e-commerce sales in Mexico in the third quarter, which could help to offset the retailer’s weak performances in the UK and Chile.
Outlook
Market analysts forecast that Walmart will record a 5% rise in its earnings per share in fiscal 2021. Its price-earnings ratio of 23 may not be cheap, but its growth strategy could lead to a rise in its stock price in upcoming years.
Disclosure: the author has no position in any stocks mentioned.
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