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The Science of Hitting
The Science of Hitting
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Walmart: Riding the Wave to New Heights

A look at the retailer's year to date fiscal 2021 results

November 18, 2020 | About:

On Tuesday, Walmart (NYSE:WMT) reported financial results for its first quarter of fiscal 2021. Revenues in the period increased 5% year-over-year to $134.7 billion, with constant currency revenues climbing 6%. The results were led by another solid quarter in the company's largest market, the United States, with comparable store sales (comps) up 6.4%, inclusive of a 79% increase in e-commerce.

As shown below, the company's two-year stacked comps in the quarter were up 10%, well above the low-to-mid-single digit two-year stacked comps that have been reported in the U.S. over the past five years.

The outsized results in fiscal 2021 reflect continued underlying improvements in the business, as well benefits that Walmart and other retailers have experienced from the pandemic. For example, grocery comps increased mid-single digits in the third quarter, with strength in food and consumables like paper goods and cleaning supplies supported by lockdowns / work from home and continued pantry loading by consumers in preparation for whatever the coming months may bring.

The quarter also saw continued strength in general merchandise categories like home goods, electronics, toys and sporting goods, which have also benefited as families spend more times inside their homes. Naturally, these changes continue to present both supply chain and inventory management challenges, but Walmart has worked hard to address these issues. As noted on the call, products like fresh meat, bathroom tissue and cleaning supplies are back on store shelves (which ensures that loyal customers will not be forced to do business with competitors), but there's still more work to be done.

As noted above, Walmart continues to make strides towards become a leading omni-channel retailer. E-commerce growth, which has only decelerated by about 20 points since the height of the pandemic, was once again led by marketplace (third-party) and online grocery.

As you can see below, e-commerce contributed roughly 600 basis points to the U.S. comps in the third quarter and continues to be a much larger driver of same store sales growth than it has been over the past few years.

As CEO Doug McMillion noted on the conference call, Walmart is "just getting started" in e-commerce, and has big plans to become a much more troublesome competitor for Amazon (NASDAQ:AMZN) in the future:

"I hope you can see that the company is changing and shaping its business model, the way that we make money today and the way we'll make money in the future will be more multifaceted, whether it's marketplace or advertising, Walmart Plus, Walmart fulfillment services, or other things to come in the future. We've just got this great opportunity, these assets, in terms of these customer relationships, any other assets that we have to monetize it in a variety of ways. And we're building those capabilities."

In the International businesses, constant currency revenues increased by 5% to $29.6 billion, with adjusted operating income climbing double digits due to higher gross margins.

In my opinion, the most important development in Walmart's International business is continued changes to renew focus on its priority markets (India, Mexico, China and Canada). In the past two months, the company has announced deals in the UK, Argentina and Japan to either sell the majority or the entirety of its retail businesses in those markets. As I've discussed in the past, I think McMillon has the right long-term strategy: focus on the handful of markets where Walmart has a good chance to win and expeditiously exit from everywhere else.

Through the first nine months of the year, revenues have increased by 7% to $407 billion. In addition, due to meaningful fixed cost leverage from higher same store sales and improving economics in the e-commerce business, adjusted operating income over the same period has increased 13% to $17.5 billion, with adjusted earnings per share up 15% to $4.08 per share.

Conclusion

As I've discussed in the past, the first few years under McMillon's leadership were primarily focused on stabilizing the company's U.S. brick and mortar business, in addition to putting the foundation in place for growing the e-commerce business. As the earlier charts show, both of those efforts have been successful. Now the company's focus is making those assets work together, in addition to continuing to build out the e-commerce offerings (marketplace for third-party sellers, fulfillment services, etc.).

While there's still plenty of work to do, Walmart has made some meaningful improvements in the past few years and was well positioned to catch the wave as the pandemic has accelerated the shift towards e-commerce and digital. They're leveraging their core strengths and finding a way to compete and win in a competitive retail landscape.

Unfortuantely, I don't own the stock - but I would love the chance to buy it again if Mr. Market began to question the business (as he did a few years ago). As long as McMillon is in charge, I think shareholders should be confident that the company is moving in the right direction – and as a corollary, competitors better keep their eyes open.

Disclosure: None

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The Science of Hitting
High-quality businesses for the long-term.

In the words of Charlie Munger, my 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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