Many have likened the rise of Amazon.com Inc. (AMZN, Financial) and the stagnation of Walmart Inc. (WMT, Financial) to a battle between e-commerce and brick-and-mortar retail.
However, this oversimplifies the problem. Walmart’s troubles go beyond e-commerce; in essence, it’s been out of touch with what customers want for a while now. Amazon keeps careful track of what is customers buy and makes use of that data to sell more products; meanwhile, Walmart doesn’t, relying on customers to take or leave whatever is in its stores. This leaves it vulnerable to losing business to competitors’ superior ad campaigns and customer targeting.
Aside from convenience, one of the main reasons e-commerce has been so successful is because of how incredibly in-tune it is with what customers want. Part of this is intentional effort from data analysis, but part of it is because it’s simply cheaper to offer smaller-batch items through online-only channels and select the most popular ones to scale up production.
Walmart might finally be coming back with the right customer narrative, though, as shoppers increasingly feel the pain of the highest inflation levels in four decades on their grocery and gas bills. Inflation for the past year was 8.5% as of March according to the consumer price index, which jumped to 8.8% for at-home food, 10% for eating out, 13.5% for electricity and 70.1% for gas.
Under these circumstances, Walmart is marketing what it does best: low prices for groceries. Additionally, the company announced on Wednesday it will be offering further discounts for fuel to subscribers of its Walmart+ service. Now that Walmart’s offerings finally seem to be more in tune with what customers want, could its stock provide value to investors going forward?
A slow grower under pressure
Walmart has never been a flashy high-growth investment, but it has been a slow and steady grower, with the stock returning an average of about 13% per year over the past decade. Over the same time frame, the company’s revenue has been on a steady uptrend, as shown in the below chart:
Despite is steady top-line growth, net income took a nosedive from 2015 to 2019. This was partially due to the impacts of various investments, divestments, restructuring moves and changes in tax laws, but operating income was also in a downtrend before picking back up again in 2021.
Squaring up with competition
Management and investors were hoping that the bottom-line impact from restructuring expenses and strategy shifts would pay off in the long run, but for now, Walmart seems to be trying to play catch-up with Amazon on the online grocery delivery front with Walmart+, and company memos also suggest management is recognizing a need to make its products more appealing to customers, like what Target (TGT, Financial) is doing.
In general, playing catch-up is a bad sign for a company since it indicates that it will need to invest heavily to get the same results as competitors. Both Walmart’s bottom-line decline and its strategy shifts point to recognition of the problem of losing market share to other grocery retailers.
This leads me to believe it’s likely Walmart will continue slowly losing market share unless it can offer something unique to customers to make it their first-choice discount retailer.
Perhaps this is what the company is trying to do by doubling the gas price discount for Walmart+ subscribers to 10 cents per gallon, but the fact this is tied to the subscription service that was made to compete with Amazon may limit the positive impact.
The only people who really benefit from Walmart+ are those who take advantage of its free online ordering and delivery; otherwise, at the annual Walmart+ subscription price of $98, you’d have to buy more than 980 gallons of gas a year in order for the subscription to pay for itself. By and large, the people most concerned about the price of groceries, and thus the people most likely to choose Walmart, would rather save the $98 per year by going to the grocery store in person.
Valuation
On Wednesday, shares of Walmart traded around $154.24 for a market cap of $424.59 billion and a price-earnings ratio of 31.59, which is higher than its historical median of 16.45. The GF Value chart rates the stock as fairly valued:
Rising inflation is already causing more people to be budget-conscious, which could result in more customers buying their groceries at Walmart rather than more expensive competitors such as Whole Foods, Amazon or Target.
However, even if the company receives a short-term boost from this, I don’t really see how it can regain its edge in the long term. Favorable macro conditions will always be short-term factors. Walmart’s edge used to be that it had the greatest variety in one place for the lowest price, but the “greatest variety” part has been lost due to the rise of e-commerce, and there are other discount retailers out there, such as Costco (COST, Financial), Aldi and many local options that know their customers better.
All things considered, I would rather steer clear of Walmart. It’s not cheap enough to be a momentum play for the high-inflation environment, and it has yet to come up with a strategy to regain a competitive edge that doesn’t involve imitating other companies.
