After being flat for most of the year, Walmart Inc.’s (WMT, Financial) stock dropped nearly 3% on Thursday to $98.64 on news of its third-quarter earnings.
Walmart was not singled out by investors, as other retailers throughout the week were similarly beaten down despite posting solid results. Macy’s (M, Financial) was down 7.2% even though it reported robust sales growth in its latest quarter. Similarly, Home Depot (HD, Financial) dropped 0.2% after reporting solid increases in quarterly store sales; its shares were off 4.6% for the week.
The retailer reported sales at its U.S. stores rose 3.4% for the latest quarter, which includes a 43% increase in e-commerce sales. The company earned $1.08 per share on revenue of $123.9 billion, an increase of 1.4% over the same period last year. The Street was looking for $1.02 a share on revenue of $124.42 billion.
Due to Walmart’s continuing investments in its online platform as well as higher transportation costs, the company’s gross profit margins dropped this quarter. The company expects the operating loss from its e-commerce operations will be slightly higher for next year. According to eMarketer, Walmart surpassed Apple Inc. (AAPL, Financial) to become the country’s third-largest online retailer after Amazon.com Inc. (AMZN, Financial) and eBay Inc. (EBAY, Financial). Sales growth was driven by its market share gains in grocery, household goods and other categories.
The Arkansas-based retailer’s gross profit margins narrowed in the latest quarter, causing consternation among some analysts who wanted to see profits keeping pace with sales gains. This is perhaps one of the reasons for the tepid reaction on the part of investors to the company’s otherwise solid third-quarter results.
Walmart expects to earn $4.75 to $4.85 a share for the full year, up from its previous guidance of $4.65 to $4.80. The consensus expectations are for earnings of $4.79 per share.
Given the respectable results reported, the surprising decline in retail stocks can, in part, be explained by investors' growing anxieties about a slowdown in global growth as well as rising interest rates. Volatility in the tech sector has rippled to other corners of the market and the retail sector was not spared.
Given the radical upending of the retail industry by the explosive growth of online shopping, the harsh reality of economic Darwinism is casting a pale over the brick-and-mortar retail industry. Those chains who fail to adopt will drop by the wayside; those who implement creative strategies for the 21st century, online world will continue in business.
Walmart is subject to the same skepticism expressed by a group of analysts that has greeted other brick-and-mortar retailers. Despite some chain stores' recent explosive growth in online sales, many analysts on the Street are still uncomfortable with the narrative that the rise of Amazon doesn’t necessarily portend the death of established retail chains. As I noted elsewhere, these analysts suffer from the Amazon-is-taking-over-the-world syndrome and no amount of evidence to the contrary is going to change their minds.
Retailers currently are conducting business in an economic environment of historically high consumer spending and confidence, low unemployment and low inflation. The harsh reality is that if a retailer cannot keep its head above water in such favorable conditions, then investors will be unforgiving. That is why many of the retail stocks, their reported third-quarter results notwithstanding, are in a holding pattern.
Tumultuous changes have wracked traditional brick-and-mortar retailers. Some companies are nimble enough to make the necessary changes in a new online shopping environment; others are not. The new course retailers have had to navigate is a tricky one that entails a delicate balancing act of combining a traditional in-store shopping experience and either establishing or growing an existing online presence. Some have adapted more quickly and successfully than others. Time will tell who ultimately will remain.
Many investors are waiting for fourth-quarter results in order to determine if some of the bigger brick-and-mortar chains are starting to finally figure out how to operate in this new hybrid retail world.
Disclosure: I have no positions in any of the securities referenced in this article.
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