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Will Walmart Pare Margin Woes With Solid E-Commerce Efforts?

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Walmart Inc. (WMT - Free Report) has been gaining from aggressive e-commerce initiatives and positive comps, which are likely to continue driving its top line.

In a bid to compete with Amazon (AMZN - Free Report) and other rivals, Walmart is trying to adapt to changing consumer preferences. In this regard, the company has been taking several e-commerce initiatives, including buyouts, alliances, and improved delivery and payment systems. Recently, the company clinched contracts to buy a 77% stake in India’s leading e-commerce business, Flipkart. Though the deal is expected to hurt the bottom line in the short run, it is most likely to bolster Walmart’s e-commerce sales in the long run. Along with this, the company’s other notable buyouts such as ShoeBuy, Moosejaw, Bonobos, ModCloth and Jet.com, and deals with Rakuten, and Lord and Taylor have been strengthening the company’s digital brand portfolio.

In addition to this, the company accelerated its online business by launching its latest Walmart2World money transfer service that makes shopping easier and faster. Apart from this, Walmart is seeing rising demand for online grocery, due to which the company is making efforts to enhance its delivery services.

In this connection, Walmart recently inked a deal with Postmates to extend its online grocery delivery service in order to cover more than 40% of the families in the United States. Further, the company’s Walmart Pickup program helps customers place orders online and then pick them up at a store for free. In earlier developments, Walmart partnered with Uber and Lyft, while it also tested same-day delivery with Deliv, in a bid to enhance its services further.

Owing to such efforts, Walmart’s U.S. e-commerce sales soared 33% in the first quarter of fiscal 2019, much better than a 23% rise reported in the fourth quarter of fiscal 2018. E-commerce sales in the first quarter improved on the back of strength across Walmart.com and online grocery, keeping management encouraged about achieving 40% e-commerce sales growth in fiscal 2019.

Markedly, sturdy comparable store sales have been one of the key growth drivers for Walmart. The company recently launched four apparel brands to enhance merchandise assortments. Also, the company is on track with store remodeling, in an attempt to upgrade them with advanced in-store and digital innovations. Walmart is also gaining from its compelling pricing strategy, which helps it draw customers.

Well, such trends continued driving the company in first-quarter fiscal 2019, wherein both earnings and revenues improved year over year and beat the Zacks Consensus Estimate. Notably, this marked Walmart’s 15th consecutive quarter of positive U.S. comps growth. Incidentally, U.S. comps (excluding fuel) rose 2.1%, driven by 0.8% improvement in comps traffic and 1.3% rise in average ticket.

Margin Pressure

However, Walmart’s compelling pricing strategy is backfiring to some extent as it remains a pressure on the company’s margins. Evidently, gross margin declined by 11 bps, 29 bps and 61 bps in the second, third and fourth quarters of fiscal 2018, respectively. In first-quarter fiscal 2019, gross margin shrank 15 bps, largely due to price investments in various markets and increased transportation costs. Also, the operating margin contracted 200 bps in the first quarter as costs associated with e-commerce investments among others, led to a rise in operating expenses.

Management had earlier projected margins to remain pressurized in fiscal 2019. Strained margins have caused the company's shares to decline 16.8% in the past six months, wider than the industry's 14.3% decline.



Nevertheless, we believe that the aforementioned sales-driving initiatives and robust efforts to improve international performance will help Walmart’s stock get back on track.

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