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Walmart Likely to Gain From Sturdy Comps Run Amid Margin Woes

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Walmart Inc. (WMT - Free Report) , which is one of the most talked about names in the retail space, has long been impressing investors with its splendid comparable store sales (comps) run. Notably, the world’s largest retailer has delivered positive U.S. comps for 16 straight quarters now, on the back of its solid efforts to drive both online and offline businesses.

This has helped shares of the company rally 12.1% in the past three months, outpacing the industry’s growth of close to 11%. In fact, Walmart’s solid omnichannel operations also help the company stand firm against the e-commerce giant Amazon (AMZN - Free Report) . Markedly, Walmart has been making constant investments in the e-commerce realm to survive the competitive frenzy. However, costs associated with such heavy investments have been hurting the company’s margins.

Stellar Comps: Walmart’s Primary Driver

Walmart has been gaining from its sturdy comps record, which is driven by its constant expansion efforts and splendid e-commerce performance. Incidentally, Walmart has been undertaking several efforts 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 drove the company in second-quarter fiscal 2019, wherein both earnings and revenues improved year over year and beat the Zacks Consensus Estimate. In fact, this also marked Walmart’s highest U.S. comps growth in more than 10 years, backed by strength in grocery, apparel and seasonal categories. U.S. comps (excluding fuel) rose 4.5%, driven by more than 2% improvement in both traffic and ticket. Moreover, e-commerce sales positively impacted Walmart's U.S. comps by 100 basis points (bps).

Robust E-Commerce Efforts

Talking of e-commerce, Walmart is trying every means to evolve with the changing consumer environment to compete with brick-and-mortar rivals and e-commerce king, Amazon. In this regard, the company has been taking several e-commerce initiatives, including buyouts, alliances, and improved delivery and payment systems. Toward this end, the company recently revealed intentions to establish a five-year strategic partnership with Microsoft (MSFT - Free Report) .

Walmart’s buyouts of ShoeBuy, Moosejaw, Bonobos, ModCloth and underscore its zeal to build an impressive digital brand portfolio. Moreover, like Target (TGT - Free Report) and Kroger (KR - Free Report) , Walmart is making aggressive efforts to expand in the booming online grocery space, which indeed was a major contributor to its e-commerce sales in the second quarter of fiscal 2019. Evidently, Walmart’s U.S. e-commerce sales soared 40% in the second quarter, on the back of enhanced online assortment with 1,100 new renowned brands and increased grocery pickups.

Will Margin Woes be Offset?

While Walmart’s online strategies have been driving its business, costs associated with investments in e-commerce expansion and technological advancements; the mix impact from growing e-commerce operations and Walmart’s compelling pricing strategy have been weighing on margins. Evidently, these factors caused the company’s gross margin to contract 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. It contracted 17 bps in the second quarter due to price investments in various markets and increased transportation costs. In fact, management earlier projected margins to remain pressurized in fiscal 2019.

Nevertheless, we expect the company’s strong comps and sales drivers to offset these hurdles and help this big-box retailer sustain its impressive momentum. Management’s solid guidance confirms this, further. Incidentally, management remains encouraged about achieving 40% U.S. e-commerce sales growth in fiscal 2019. Also, this Zacks Rank #3 (Hold) company raised its U.S. comps growth and earnings per share guidance for fiscal 2019, when it reported first-quarter results. U.S. comps are anticipated to grow roughly 3%, while adjusted earnings are expected to be $4.90-$5.05 per share.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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