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The Science of Hitting
The Science of Hitting
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Walmart: Continued Omni-Channel Progress

A look at the retailer's first quarter results

May 20, 2020 | About:

On May 19, Walmart (NYSE:WMT) reported financial results for its first quarter of fiscal 2021. Revenues increased 9% year-over-year to $134.6 billion, with constant currency revenues climbing 10%. The results were led by another solid quarter in the United States, with comparable store sales (comps) up 10%, inclusive of a 74% increase in e-commerce (guidance provided in the Q4 fiscal 2020 release called for roughly 30% U.S. e-commerce growth in fiscal 2021). Considering that Walmart’s U.S. e-commerce revenues were $24 billion in fiscal 2020, that's some impressive growth.

As shown below, this reflects a material acceleration in the two-year stacked comps.

These outsized results reflect the boost that Walmart and other esssential retailers have experienced from the pandemic. Comps increased by 4% in February, the first month of the quarter, before accelerating to mid-teens growth in March as the arrival of Covid-19 materially impacted consumer behavior. As noted on the call, outsized growth was sustained in April, with comps up 10%.

The pandemic initially led customers to stock up on essentials like food and consumables, which led to a surge in demand for paper goods, surface cleaners and grocery staples. As the quarter progressed, this shifted to in-home needs and entertainment offerings, resulting in outsized growth for video games, home office supplies and exercise equipment. Finally, near the quarter's end, the company saw a benefit from the disbursement of government stimulus checks, which led to discretionary purchases like televisions, sporting goods and toys.

Naturally, these changes in customer needs presented supply chain and inventory management challenges, as well as other issues such as staffing enough employees while also ensuring a safe environment for both employees and customers. From where we stand today, it looks like the company has done a skillful job navigating its business through the early days of this crisis.

As noted above, Walmart continues to make strides towards become a leading omni-channel retailer. E-commerce growth in the quarter was led by marketplace and online grocery, with help from new customer behavior related to the pandemic (the number of customers trying the company’s online grocery pickup and delivery services has quadrupled since mid-March). As you can see in the chart below, Walmart's e-commerce business contributed 390 basis points to the U.S. comps in the first quarter, far outpacing the 150 basis point average contribution reported over the past eight quarters.

Walmart reported 9% revenue growth and 6% operating income growth. This reflects a 70 basis point contraction in gross profit margins both from merchandise and channel headwinds, offset by a 60 basis point improvement in operating expenses from sales leverage, despite significant investments associated with running the business during the pandemic. As a result, consolidated operating (EBIT) margins contracted by 10 basis points in the quarter to 3.9%.

The company repurchased $723 million worth of stock in the quarter at an average price of $121 per share, with the share count declining by more than 1% year-over-year. While management did not specifically comment on capital returns, the activity in the first quarter leads me to believe that we may see reduced repurchases in the coming quarter compared to what we saw in the year ago period. The net result in the period was a 4% increase in adjusted earnings per share (EPS) to $1.18 per share. (The slowdown relative to EBIT growth reflects the impact of below the line items.)

Conclusion

Walmart, like many retailers (particularly grocers), is benefiting from the short-term change in consumer behavior caused by the pandemic. Naturally, that tailwind will eventually fade. The more important point, in my opinion, is that the company continues to make sustained progress towards becoming a leading omni-channel retailer under CEO Doug McMillon.

As I’ve discussed in the past, the first few years under his leadership were spent stabilizing the core (U.S. brick and mortar). As the comps chart above showed, those efforts have been successful. Now the focus in the United States has shifted to its online offerings (both pickup and delivery). While progress has come in waves, and there’s still plenty of work to do, I think Walmart has made some meaningful improvements in the past few years. The success they’ve had with online grocery shows that they’re leveraging their core strengths to find a way to compete and win. And the company's "capacity to suffer" in recent years (through the P&L) suggests that they are in this for the long haul.

While I don’t own the stock, I’m excited to see how Walmart’s business evolves over the next decade. As long as Doug McMillon remains at the helm, I think shareholders should be confident that the company will continue to make strides in the right direction.

Here's CFO Brett Biggs with the last word:

“We're focused on building the world's greatest omni-channel platform. We continue to position the business for the long-term by leveraging our unique assets, reducing friction in customers' lives and providing a strong value proposition with a commitment to EDLP (everyday low prices).”

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About the author:

The Science of Hitting
I look to high-quality businesses for the long-term. In the words of Charlie Munger, my preferred approach is "patience followed by pretty aggressive conduct." I run a concentrated portfolio, with the top five positions accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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