How Walmart Just Lost The Plot

  • Walmart earnings were down 8% for the Christmas quarter, and sales were down too.
  • Walmart is abandoning its plan to open smaller stores, and closing those that exist.
  • Walmart just lost the plot.

Walmart (NYSE:WMT) disappointed investors with its latest quarterly earnings. For the quarter ending in January, Walmart's net income was down 16% from a year ago, and sales actually fell slightly, when the impacts of currency were accounted for. Walmart's net income came in at $4.57 billion, $1.44 per share, on revenue of $129.7 billion, against net income of $5 billion, $1.54 per share, and revenues of $130.6 billion a year ago.

Walmart's management blamed international operations for the lower earnings, as those sales and earnings had to be translated into dollars in order to be reported. But, even with fuel sales taken out (sales were lower because oil prices were lower), Walmart's same-store sales rose just 0.5%, against a rise of 1.5% a year ago.

In response, Walmart's management decided to stop its change engine. The "Neighborhood Market" concept that was expected to transform the company, with smaller grocery stores and even gas station, was canceled. Existing Walmart stores using the concept will be closed, a total of 154 outlets just in the U.S.

Instead, Walmart is charging directly against Amazon (NASDAQ:AMZN) by increasing its investments in Silicon Valley, where costs are high and the company's reputation among technologists is low. This has fail written all over it.

Wal-Mart is opening a second digital operations center in Silicon Valley while continuing to cut head count at its headquarters in Arkansas. It has merged the tech teams in the Valley with those in Arkansas.

The problem is that Walmart’s reputation in the Valley is toxic. This means it has to be more for lower-rated talent than local competitors. Yet Walmart is mainly opening fulfillment centers in tech centers like Atlanta, where it could actually get the kind of transaction-processing talent needed to integrate its aging computer infrastructure with modern e-commerce. And by running e-commerce out of “fulfillment centers”, it misses the point Walmart CEO Doug McMillon was trying to make when he launched the initiative, namely the need to break bulk in the stores and serve customers locally.

McMillon, who rose to the top of the company from working in a warehouse while a college student, came to his job two years ago with high hopes and high expectations, but he seems to be doubling-down on a failed strategy while backing away from more meaningful change.

The founding Walton family’s share of the Walmart common is already over 50%, meaning they have the right to take the company private and take control of the board. No one in this generation of the family works at the store, meaning their interest is going to remain in collecting on their investment, not growing the company. There is not much more Walmart can do with stock buybacks.

Investors should probably look elsewhere to benefit from the retail improvements created by low oil prices until Walmart gets its act together. Macy's (NYSE:M) anyone?

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