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The Science of Hitting
The Science of Hitting
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Continued Execution at Walmart

A look at 2nd-quarter results for the world's largest retailer

August 15, 2019 | About:

On Thursday, Walmart Inc. (NYSE:WMT) reported financial results for the second quarter of fiscal 2020. Revenue increased 1.8% to $130 billion, with constant currency revenue climbing 3%. The results were led by another solid quarter for the Walmart U.S. business, with comparable store sales up 2.8% in the quarter on traffic (up 0.6%) and ticket (up 2.2%) growth. The retailer's comps in the U.S. have now been positive for 20 consecutive quarters.

The company is taking market share in key categories like food and general merchandise, as well driving higher private label penetration. In addition, it is benefiting from outsized growth in e-commerce (up 37% in the second quarter, which contributed 140 basis points to U.S. comps).

As noted in management’s commentary, the company continues to see strength in areas like online grocery where it is able to leverage its supercenter footprint to effectively meet customers’ needs:

“Having stores close to customers is a competitive advantage and we’re leveraging that to provide convenience through grocery pickup and delivery, pickup towers, and the in-home delivery test that will launch this fall. We have more than 2,700 stores that offer free grocery pickup and more than 1,100 stores that offer same-day grocery delivery, keeping us on pace to reach year-end goals of 1,600 same-day grocery delivery stores and 3,100 stores with grocery pickup.”

The two-year stack, which removes some of the noise that can occur in any given quarter, is now at its highest level in more than a decade:

Because the company is no longer expanding its unit count in the U.S., revenue growth was in line with the growth in comps (up 3% to $85.2 billion). Operating income for Walmart U.S. increased 4% to $4.7 billion, and now increased for five consecutive quarters.

U.S. margins expanded slightly to 5.5%. Physical stores leveraged expenses for the 10th consecutive quarter due to productivity improvements and sales growth (for the Walmart U.S. business as a whole, the operating expense rate declined roughly 30 basis points, offset by roughly 20 points of gross margin compression). If Walmart can expand operating margins in the face of strong e-commerce growth, that’s a very encouraging sign for the financials in the years to come.

For the company as a whole, operating income declined 3% in the second quarter, largely due to the inclusion of Flipkart (through the first six months of the fiscal year, Walmart International's operating income has declined by more than 30% on a low single-digit decrease in revenues).

The share count declined by nearly 3%. Through the first six months of the fiscal year, Walmart has spent $3.7 billion on repurchases - twice as much as it spent in the first half of fiscal 2019. As a result of the lower share count, adjusted earnings per share fell by roughly 1% in the quarter and year to date. Management has guided for fiscal 2020 earnings that are roughly comparable to what the business earned in fiscal 2019 (if the dilution from Flipkart is excluded, earnings per share would increase by mid-to-high single digits).

Conclusion

Walmart has come a long way in the five years since Doug McMillon became CEO. It has stabilized the core business in the U.S. and is now making meaningful strides in e-commerce. As McMillon noted in his second-quarter remarks, the company is laser-focused on continuing to satisfy customers and win their business:

“From a performance point of view, we're pleased with the strength we see in the business. Customers are responding to the improvements we're making; the productivity loop is working… We continue to have momentum, especially in the U.S. We’re favorably positioned as we leverage our expansive Supercenter network to deliver a robust omnichannel experience. More than ever, we’re innovating across the business. We’re experimenting with emerging technologies to improve store operations and reduce friction in our customers’ lives. The initiatives we have underway provide extended access to our brand and position the company to earn a greater share of our customers’ wallet over time.”

With McMillon in charge, I’m confident Walmart will make that happen. I don't own the stock at this time, but would love to partner with this management team at the right price. Hopefully Mr. Market is kind enough to give me an opportunity to do so.

Disclosure: None. 

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About the author:

The Science of Hitting
I'm a value investor with a long-term focus. My goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach is "patience followed by pretty aggressive conduct." I run a concentrated portfolio - a handful of equities account for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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