Online sales are continuing to eat away at traditional brick and mortar retail sales. E-commerce sales now account for 8.4% of all retail sales and e-commerce sales growth has been easily outpacing overall retail sales growth for years. If you want to see firsthand evidence of the continued shift just visit your local mall or check the stock prices of many of the department store companies.
If you want to invest in e-commerce on the retail end you basically have only one choice: Amazon.com (AMZN, Financial). Amazon’s $79.3 billion (or $99 billion depending on how you count) in online sales are almost six (or seven) times the amount of the No. 2 online retailer. In e-commerce, it’s Amazon and a bunch of hopefuls.
However, out of the group of hopefuls it’s likely Walmart (WMT, Financial) (the No. 2 on the list) has the best shot at becoming a closer second to Amazon (I highly doubt anyone will unseat Amazon as the No. 1 e-commerce company). Additionally, Walmart’s valuation compared to Amazon is much more attractive.
| Company | P/E Ratio | Online Sales | Latest Quarter E-commerce Growth |
| Amazon.com | 174.85 | $79.3 billion | 23% |
| Walmart | 15.5 | $13.7 billion | 10% |
It’s worth pointing out that Amazon also has a higher e-commerce sales growth rate and comes with a bunch of other cool businesses such as Amazon Web Services so a higher multiple is deserved. Nevertheless if Walmart is able to transform into the solid No. 2 player in e-commerce, the stock looks downright cheap.
Under new (promoted in 2014) CEO Doug McMillon Walmart has begun putting more of an emphasis on e-commerce. Indeed, the company just recently purchased e-commerce retailer Jet.com for $3.3 billion and is targeting e-commerce growth of 20% to 30% over the next three years. In order to continue its transformation into an e-commerce leader Walmart needs to do the following.
Keys to Walmart’s e-commerce success
Walmart has the best physical distribution infrastructure of any Amazon.com competitor. The company has around 6,300 locations in the U.S. and already has the logistics network to keep those stores supplied. If Walmart can find a way to use some of its stores as delivery hubs it could offer next-day and same-day delivery on many items which would give it a great competitive advantage against Amazon. In fact, 90% of Americans live within 10 miles of one of Walmart’s stores.
Walmart also has a huge advantage when it comes to grocery shopping, an area where it looks like Amazon intends to compete. Walmart already offers free pick-up for online grocery shopping. The problem is that Walmart ranks close to dead last year after year in customer satisfaction when it comes to its grocery business. Now add in the fact that most people want to pick their own grocery items, specifically meat and produce so they can be assured of the quality, and you have a pretty big problem. Walmart needs to devote resources toward improving its grocery business, or it risks losing some business to Amazon.
The company also needs to expand awareness and utility of “Walmart Prime” (technically Walmart ShippingPass). For $49 per year ShippingPass gives subscribers access to free two-day delivery like Amazon’s Prime service. Previously ShippingPass was only good for three-day delivery, but Walmart made the right move in bumping it up to two-day delivery. In fact, adding same-day or next-day delivery on some items could significantly drive increased sales. In any case, only 14.8% of online shoppers say they would sign up for ShippingPass so Walmart has a ways to go to drive broader adoption and position its e-commerce platform as a legitimate No. 2 to Amazon.
Summary
Walmart is a stock we are seriously considering for our client portfolios and one you may want to investigate further as well.
The upside in e-commerce and Walmart’s successful turnaround of its brick-and-mortar retail business make Walmart a compelling possibility. There are signs that the company is making progress moving in on Amazon’s turf. For instance, the average household income for a Walmart.com shopper is now about the same as the average Amazon shopper. Online sales have also rebounded recently after several quarters of slowing growth.
Disclosure: No positions.
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