Walmart (WMT, Financial) recently reported better-than-expected earnings results, sending the broader market higher and helping to nudge the consumer staples sector upwards.
The company’s results were all the more impressive in light of recent mixed signals on the health of the U.S. economy, which had caused consternation among investors about the continuing prospects for traditional retailers after holiday sales results are reported. The retail sector posted mixed results in January, with some chains including Target and Costco reporting one of the strongest holiday seasons in years, while sales for other department stores, such as Macy’s and Kohl's, were uninspiring.
The company made strong inroads in ramping up its online grocery sales, helping its overall e-commerce business rise 43% for the fourth quarter. Overall e-commerce growth was attributable to more consumers using its online grocery pickup service and spending more per trip. Not only did the company report an increase in visits to its stores in the last quarter, but also, the average customer’s receipts increased 3.3% over the prior year.
The company reported that same-store sales increased 4.2%, exceeding its own expectations of 3.2%, and it is maintaining its comparable sales guidance of 2.5-3% for the full year. The company expects 35% growth in online sales for 2019. Walmart reported a $43.69 billion profit for the fourth quarter, compared to $2.18 billion for the previous year. The company posted adjusted earnings at $1.41 per share, handily topping the Street’s expectations of $1.33 a share. Total revenue was $138.79 billion, an increase of 1.9% from the prior year.
Investors responded favorably to the fourth quarter earnings report, pushing the stock up 3%. Walmart’s shares are recovering from the bloodletting visited upon the market last fall. The stock is currently selling for $101.81, approaching its 52-week high of $106.21.
Like other retail chains, Walmart’s better-than-anticipated results reflect consumers continuing confidence in the economy, resulting in robust retail sales. One of the reasons investors have expressed doubt for the long-term health of the retail sector is that department stores have had tailwinds at their back for the past several years due to a strong economy, historically unprecedented low employment and robust consumer spending.
Those chains that are struggling now in such a favorable environment may suffer inordinately, should current economic growth slow. Given the increase in its durable goods sales and rapidly growing online grocery business, Walmart is better positioned than some other brick-and-mortar retailers to weather any economic storms looming on the horizon.
Walmart has implemented a hybrid sales strategy that seeks to grow its online component while retaining its retail in-store shoppers. The strategy attempts to provide more choices to the consumer, with the convenience of in-store pickup of both groceries and other retail products ordered online. Target, like Walmart, is another company that has successfully implemented a melding of a traditional in-store shopping experience with a robust online presence that presents customers with an integrated and convenient shopping experience.
Although their product lines may differ in substantial ways, both Walmart and Target are now reaping the rewards from developing an online and in-house total shopping experience by taking advantage of their strong geographical footprints to make it easy for customers to pick up online orders in nearby stores. This is precisely the strategy Walmart as well as Target have pursued assiduously, and the results are paying off.
Walmart has used its geographical store-saturation to its advantage, something that many department stores cannot emulate. Target has successfully adopted a similar strategy of leveraging the geographic high presence of its stores as a complement to its push to expand its online business. Although some department store chains, such as Macy’s and Nordstrom, have been purposeful in establishing and growing the online component of their business, Walmart was early out of the gate, and its lead on other retailers is manifest in the dramatic sales growth of its online division. Some retail chains have suffered because they lack the necessary resources to respond to Amazon’s oversized presence in the online retail market.
Clearly, as the chart below attests, the company’s digital online initiatives in response to the Amazon Goliath have borne fruit.
Although the stock is currently trading with a price-earnings ratio of 21.9, higher than its five-year average of 16.7, given its robust online grocery sales and the successful implementation of its digital commerce initiatives, Walmart still has room to grow.
Disclosure: I have no position in any of the securities referenced.
