Shares of traditional retail giant Walmart Inc. (WMT, Financial) rallied following the announcement of its second quarter results, which outperformed analyst estimates.
The company announced its second quarter earnings on Aug. 16, beating analyst estimates on both revenue and earnings, sparking a sharp rise in the stock price. That rally seems to have subsided after the recent pullback, which has made some investors and analysts suggest that perhaps the supposedly "short-lived rally" could be over.
But when looking at the company’s overall performance since the start of the year, in addition to a series of projects that it has launched over the last few quarters, and projected growth rates for fiscal 2019, this retail giant could yet have a lot of room to run before the end of the year.
Over the last few quarters, Walmart has been leveraging its traditional stores to augment its investment in online platforms as it continues to respond blow-for-blow to every challenge presented by e-commerce giant Amazon.com Inc. (AMZN, Financial).
Amazon has been expanding its addressable market by targeting markets that were previously not a major part of its portfolio, including pharmaceuticals, auto parts and groceries, through acquisitions in the process helping to drive its market share.
Amazon, which was established more than three decades after the founding of Walmart, has grown in a little over two decades to become the world’s second-largest publicly listed company in terms of market cap with a value of about $942 billion. Walmart, which employs more than 2.1 million people globally, is in the mega-cap club with a market value of $283 billion.
The rivalry between these two retail giants, albeit on different playgrounds, has been intense over the last few years. In the early-to-mid 2000s, the biggest question was whether Walmart would be able to adapt to the changing consumer behavior as online retail continued to gain traction. It is correct to say that the company has been up to the challenge even given Amazon’s dominance.
The next question was if Walmart tried to adapt its businesses to new shopping trends by launching an online marketplace, would it ever challenge the likes of Amazon and eBay Inc. (EBAY, Financial)? The answer to that is still pending, but given the recent developments made by Walmart, the traditional retailer appears to be getting closer.
Walmart has been opening pick-up stations across several of its branches including 1,800 just for groceries as it seeks to implement what analysts are calling a "bricks-and-clicks" strategy, which centers on combining brick-and-mortar stores with online retail platforms to provide efficient delivery services to online shoppers. The same strategy has been employed by Best Buy Inc. (BBY, Financial), and it is seen as an effective method to fend off the challenge of giant retailer Amazon.
The company’s online platform Walmart.com has also received a major redesign, which includes a 3D-virtual tour of home category and an additional 1,100 new brands including Shimano, Therm-a-Rest, Lord & Taylor and Steve Madden. And like Amazon, Walmart has recently been very active in mergers and acquisitions. It has acquired the likes of Jet.com, Parcel, Madcloth and Shoebuy as it seeks to widen its addressable market in the e-commerce marketplace.
Therefore, while the company’s late entrance into online retail will continue to be one of the biggest opportunities missed in its history, it does appear to be making up for lost time quickly, which when leveraged with its presence across the country and in global markets could turn out to be a major revenue contributor in the next few quarters.
Walmart’s e-commerce business has benefited massively from the company’s acquisitions and internal reinvestments triggering double-digit growth rates over the last few years. In fiscal 2019, the company expects sales from e-commerce operations to grow by 40%.
Walmart’s top line continues to witness slow but steady growth, and this is expected to continue for the next two years. Earnings per share is expected to experience a short-term slowdown in fiscal 2019, but a recovery should come shortly after, in fiscal 2020 and 2021, as most of the ongoing projects begin to generate a steady income.
Last year, Walmart posted revenue of over $500 billion, and it is expected to top $550 billion in revenue in the next two years, according to analyst estimates. If online retail hits the projected growth rates, a lot more positives could be coming in the way of Walmart. There is certainly some room left to run despite the recent spike in stock price, which now appears to have subsided.
The company’s growth story looks interesting considering its size and recent sentiment towards its ability or inability to battle Amazon for a sizeable share of the e-commerce market.
Disclosure: I have no positions in the stocks mentioned in the article.
