PMC Weekly Review - February 23, 2018

A Macro View: “Can Walmart Succeed in the New World of Retail?

On Tuesday, the blue-chip stock and retail giant, Walmart (WMT), suffered its worst percentage decline in more than 30 years, following a disappointing fourth quarter report and much slower-than-expected online sales. The $10.67 price decline was the worst daily dollar sell-off of Walmart shares in history, and the largest percentage decline since January 1988.1 The headline reasons behind the drop were fourth-quarter earnings that fell by 42.1% to $2.2 billion, due to margin compression within online sales, and online sales growth of only 23%, which was down from the third quarter’s 50% online growth rate. The selling pressure on Walmart pushed down both the Dow Jones and S&P 500 Indices, snapping a six-day winning streak for US equity markets. The magnitude of the sell-off prompts taking a closer look at what led to Walmart’s decline.

With retail, as in many industries, it all comes down to how well companies execute online. Walmart investors have focused over the past few years on the company’s approach to e-commerce, and whether it can transform itself to reach online shoppers who want more for less. Walmart’s online focus centered in many ways on combating the rise of Amazon’s (AMZN) retail prowess over the past two decades, as Jeff Bezos pivoted Amazon from an online book retailer to its true definition as “The Everything Store.” In seeking to disrupt Amazon’s rise to dominance in online retail, Walmart has taken a few pages from the Bezos playbook: shifting its pricing model, integrating several large online acquisitions, and making substantial internal investments in the space.

Walmart has invested billions of dollars in building out its e-commerce business over the past few years. In 2016, it purchased for $3.3 billion, viewed by some as its best way to battle Amazon. With the acquisition, Walmart gained not only’s customers (younger and more affluent millennials), but also the company’s pricing algorithm, which could greatly enhance the experience. Although the acquisition was the largest, it was just one of a spree of e-commerce acquisitions that Walmart completed in the past five years, including ShoeBuy, Moosejaw, Bonobos, and ModCloth, to name just a few. Within its core retail model, Walmart also has pushed its online business, allowing customers to pick up items in store, offering two-day shipping with each purchase, and testing an associate-delivery program, in which Walmart employees, on their way home from work, will deliver orders to customers’ doors, or even place groceries right into their refrigerator. These measures have made Walmart successful in attracting shoppers who typically spend nearly twice as much online as the average in-store Walmart shopper.

As Walmart has sought gains in market share by making important strides in online commerce, Amazon has not stood still: it continues to grow at a rapid pace, with no fear of competitors in its path. Last June, Amazon announced its acquisition of Whole Foods, adding higherend groceries and a valuable distribution network of hundreds of stores to support its online business.3 Amazon also continues to be one of the stock market’s most loved companies, and even Walmart’s 46% share price gain in 2017 pales when compared with Amazon’s 56% increase. Over the past five years, Amazon has returned 41% annually, compared with 7.6% for Walmart, and 14.8% for the S&P 500 Index. In terms of market cap, Amazon wins as well, with roughly $700 billion compared with Walmart’s $275 billion. However, Walmart’s $485 billion in 2017 sales easily trumps Amazon’s $178 billion, less than one-third of Walmart’s. And in net income, Walmart posted $13.6 billion, versus Amazon’s $3 billion. So with basic financial metrics being such clear wins for Walmart, why does Wall Street still maintain its love for Amazon?

All roads lead back to online. The stock market has always embraced Amazon’s slick approach to e-commerce, with a website built to deliver products from A to Z, and looked the other way when it came to tight profit margins or increasing expenses. Although Walmart hasn’t enjoyed that luxury, it has ramped up its online offering by acquiring and investing in the infrastructure to improve its online retail experience. Wall Street rewarded Walmart’s actions in e commerce, leading to the company’s best calendar yearperformance since 1999. Investors also can see that Walmart’s sell-off this week comes down to its online strategy execution. Can Walmart successfully compete with the mighty Amazon in online retail? Only time will tell, but Walmart’s taste of success in online sales in third quarter 2017, coupled with its deep pockets that can fund further investment, means Amazon should be prepared to go a few more rounds in e-commerce with the all-time king of retail.

Tim Murphy
VP, Senior Portfolio Manager

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