- Walmart beat expectations and raised annual guidance.
- The strategic shift to e-commerce accelerated with recent deals and by bringing in the Jet.com CEO to manage the business.
- Core activities strength and e-commerce progress reaffirm my bullish thesis on Walmart.
Retail giant Walmart (NYSE:WMT) reported its Q2 2017 earnings last week with better than expected revenues and EPS figures coupled with higher guidance that triggered a 3.5% surge in stock price after the announcement. This unusual uptick in Walmart’s stock price is continuing the nine months long rally that started last November and has seen Walmart stock price rise by more than 35%. Walmart's rise is fueled by higher than expected bottom line performance, massive restructuring to improve core business profitability and substantial investments to generate new emerging revenue streams.
Walmart reached this earnings event with two significant e-commerce deals behind it: the Yihaodian and JD.com deal in China and the Jet.com acquisition in the US. These deals are a part of a significant strategic change the company is trying to undertake, to shift its focus from traditional brick-and-mortar retail to e-commerce. Such a significant shift for a retail behemoth like Walmart takes time, costs a lot of money, and requires the company to run in a demanding environment where it needs to strengthen its core business while investing in the emerging business.
The Yihaodian-JD.com deal was aimed at enhancing Walmart’s e-commerce business in China through JD.com’s extensive network, significant market share, and broad logistics chain across the country. Even though the Yihaodian deal with JD is a strategic move that the company will benefit from in the long term, the deal also brings some short-term benefit, increasing Walmart’s forecasted adjusted EPS for the fiscal year 2017 by $0.14 (net of tax). In my opinion, the Jet.com acquisition will have a larger impact on the company in the immediate term, with Jet.com CEO Marc Lore becoming the new president and CEO of Walmart’s e-commerce business, bringing with him years of experience that could level up Walmart’s offering and accelerate the shift towards e-commerce. Mr. Lore is an e-commerce veteran who launched Jet.com after he left Amazon.com, Inc. (NSDQ:AMZN), which he joined after the e-commerce giant acquired his startup Diapers.com for $545M.
Even though the recent changes in the e-commerce business are not yet reflected in Walmart’s financials, the company still reported an impressive improvement in YoY growth in this business, up from 7% in Q1 to 11% in Q2. On the other hand, Walmart continues to grow its domestic traditional retail business at 3% YoY, and this is the eighth consecutive quarter that this segment has grown in sales. Moreover, gross margins increased domestically due to reduced transportation costs, driven by lower fuel prices and logistics chain improvements. This is an important part of the shift that Walmart is attempting to make towards e-commerce, as the company has to make sure it stands on stable ground and is generating an increasing amount of revenues to allow the massive strategic shift to take place.
In the international segment, Walmart’s sales dropped 7% YoY mainly driven by weakness in UK and Brazil. The economic environment in Brazil weighed on Walmart, as traffic dropped 3.5% YoY, driving down sales 0.4% YoY. In the UK, the massive competitive challenges from hard discounters drove traffic and sales significantly lower, as net sales dropped 5% YoY and traffic dropped 6% YoY. The local management in the UK is now working to improve Walmart's positioning there through many tactical and commercial steps, but no drastic actions are in sight at present.
Source: Walmart Q2 2017 earnings presentation
As mentioned above, Walmart continued to increase its bottom line with a 9% rise in net income and 12% rise in diluted EPS. As for operating income, the company ended Q2 2017 with an operating profit only 1.5% higher than the same quarter last year. The impressive growth in EPS even as operating profits changed only slightly is the outcome of an increased share repurchase program. In Q2, Walmart invested a whopping $3.5B to return money to shareholders either in the form of dividends or through share repurchases, which in total increased 42% YoY.
Source: Walmart Q2 2017 earnings press release
Overall, Walmart reassured investors about all the important issues. The e-commerce shift is ongoing and will now be led by an e-commerce specialist with vast experience in the market. Walmart’s core businesses domestically and internationally are robust and provide a stable ground to perform the strategic change. The stability of Sam’s Club adds another layer of certainty to the business. I believe Walmart will continue to progress towards building a bigger and healthier e-commerce business under Marc Lore to seriously challenge Amazon and Alibaba (NYSE:BABA). Going out of this earnings release, I reaffirm my bullish thesis on Walmart stock.