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Can Walmart (WMT) Fight Amazon (AMZN) With New E-Commerce Center?

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Walmart (WMT - Free Report) made headlines Tuesday with news that it plans to open an e-commerce center in the Bronx neighborhood of New York City. At first, it will only fulfill orders for Jet.com, which the firm acquired in a $3.3 billion acquisition nearly two years ago. The main focus will be on the delivery of products such as electronics and groceries.

The Omnichannel Approach

Walmart has been fighting against the ever-expanding influence of Amazon (AMZN - Free Report) through the development and refinement of its omnichannel retail model. Omnichannel refers to an integrated approach that provides shoppers with a uniform experience across a firm’s online and offline channels. For Walmart, this means offering same-store grocery delivery, streamlining in-store checkout processes, and consolidating its inventory across its e-commerce and brick-and-mortar units. 

The firm recently inked a contract with India’s Flipkart, agreeing to purchase a 77% stake in the e-commerce firm for $16 billion. While this will hurt Walmart’s bottom line in the short run, it is expected to bolster its e-commerce sales in the long term. It has also bought big name retailers Bonobos, Moosejaw, ModCloth, and ShoeBuy as it continues to build its digital portfolio.

These endeavors are already starting to bear fruit. In its latest earnings report, Walmart saw US e-commerce sales surge 33%, representing a 10% increase year-over-year. Management expects this trend to continue, setting a guidance of 40% growth for FY19.

Gaining presence in New York has long been on Walmart’s to-do list, having launched numerous attempts over the years, to no avail. The new fulfillment center could potentially be very lucrative, but it will not be easy. Amazon already offers Prime Now delivery and holds a physical presence in the area thanks to its acquisition of Whole Foods.

Still, Walmart is continuing efforts to expand its own delivery service, acquiring logistics startup Parcel last October. Parcel is based in New York and will partner with Jet to offer deliveries from the fulfillment center to customers in the city. Details on delivery pricing and availability are not yet available, but will likely be at competitive rates.

The Big Picture

Shares of Walmart stock are down 12.3% year to date, with the stock hurt by a comparatively weaker Q4 FY18 earnings report that missed earnings and marked a decrease in e-commerce sales growth. The company has since started to rebound on the back of a solid Q1 FY19 report that included earnings of $1.14 per share on revenues of $122.7 billion, representing 14% and 4.4% respective year-over-year growth.

The e-commerce war has spilled over into China, and Walmart has continued its partnership with JD.com (JD - Free Report) to extend online grocery delivery services. Walmart saw a 4% increase in comps within the nation, the highest growth it has seen in the region in over five years. Meanwhile, Amazon faces more difficulty as it competes directly against both JD and Alibaba (BABA - Free Report) subsidiary Taobao, the two largest e-commerce platforms in the country.

Back in the US, Amazon is also merging online and offline retail by bringing Prime membership rewards to Whole Foods. It is also experimenting with Amazon Go, stores with very few employees that charge customers by scanning their phones and automatically charges them when they leave the store. The flagship location is in Seattle, but it is currently expanding, with a second location being built in Seattle and two coming to Chicago.

Walmart and Amazon are fighting to internally improve capabilities in what is their counterpart’s main business. Walmart seeks to build the inventory and online network that Amazon has established, whereas the latter seeks to develop the physical presence that the former is synonymous with. However, Amazon is also developing its other segments at the same time, seeing rapid growth in cloud computing, logistics, and devices.

Outlook

While Walmart appears to have a bit of an edge against Amazon in China and India, it is playing catch up in the US. The new facility in the Bronx is part of efforts to bridge that gap. Still, Amazon’s unprecedented growth continues. It reported a 43% increase in net sales to $51 billion last quarter, which is a startling number for a company of its size.

Not all of Amazon’s growth has come from e-commerce, but it shows that Walmart needs to act quickly to grab a larger portion of the market. It appears to be doing just that, and Tuesday’s news reflects a step in the right direction. Investors should keep watch on both firm’s movements, because with new announcements released seemingly every other week, competition will only grow fiercer.

Due to a mix of upward and downward earnings estimate revisions, Walmart currently sits at a Zacks Rank #3 (Hold).

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