Walmart Gives Tepid Outlook As Grocery Competition Mounts
Walmart Stores, racing to fend off Amazon and a fresh attack from European grocery discounters, gave a lukewarm earnings forecast for the third quarter – a sign that heavy spending aimed at maintaining its edge is taking a toll.
The shares slid in early trading Thursday, after the retail giant said that profit will be 90 cents to 98 cents a share in the period. Analysts had projected a number at the top of that range.
The outlook tempered enthusiasm after Walmart posted its best grocery sales growth in five years last second quarter, helped by the end of a record-setting bout of food deflation. The grocery business accounts for more than half of Walmart’s revenue, but it’s under attack like never before. Most notably, Amazon is acquiring organic-food purveyor Whole Foods Market in a bid to become a national grocery powerhouse.
“We have to take things that are working and lean into them,” Walmart's chief financial officer, Brett Biggs, said in an interview.
The shares declined as much as 2.4%, to $79.03, in pre-market trading, after the results were posted. Walmart had been up 17% this year through Wednesday’s close.
The downbeat forecast illustrates the high cost of Walmart’s push to catch up to Amazon online. Chief executive officer Doug McMillon has channelled more than one third of the company’s capital-spending budget into digital initiatives like specialised e-commerce distribution centres – up from just 20% a few years ago.
Profit margins on online sales are narrower than those for in-store sales, due to the costs of fulfilment. Walmart’s operating margins declined in the quarter, according to Moody’s analyst Charlie O’Shea.
US same-store sales rose 1.8% in the second quarter, matching the gain projected by analysts. Excluding some items, earnings amounted to $1.08 a share in the period, which ended on 31 July. Analysts estimated $1.07. The Bentonville, Arkansas-based company raised the lower end of its full-year earnings guidance to $4.30 a share, with the upper end remaining at $4.40.
The question now is whether Walmart can battle Amazon while keeping Aldi and Lidl at bay. The German no-frills chains are expanding into the US, targeting the same low-income shoppers on whom Walmart depends most.
Though costly, Walmart’s investments in e-commerce are helping boost its top line. The US online division saw gross merchandise volume – a measure of all the goods that it sells – increase 67% in the second quarter. Total revenue climbed 2.1%, to $123.4 billion.
Walmart also is facing a renewed threat from long-time bricks-and-mortar rival Target. That company boosted its annual forecast earlier this week, after improving both its online sales and customer traffic. CEO Brian Cornell aims to refurbish stores, open more small locations in cities, and speed the delivery of online orders.
“[Heavy discounting should continue this quarter] as Walmart and Amazon continue their battle over market share,” O’Shea said via a note. “As Walmart is a key player across most back-to-school/back-to-college product categories,” he said, “we would expect further promotional activity.”