Amazon.com Inc and Wal-Mart Stores Inc are battling for the title of "low price leader" by lowering prices.
Despite the strong sales during the Black Friday weekend, it has been a turbulent year for the U.S retail industry this year, thanks to eCommerce giant Amazon.com Inc (NASDAQ:AMZN). Retail chains like Macy's (NYSE:M) have closed down hundreds of stores in a battle to survive. Bespoke Investment group has even constructed a "Death By Amazon" Index which includes 62 brick-and-mortar retailers whose businesses have been hurt by Amazon and internet shopping. This index has declined by around 15% this year alone. However, not all the company's included in this index have fared badly. One of the exceptions is Bentonville, Arkansas based retail giant Wal-Mart Stores Inc (NYSE:WMT) which has delivered a strong performance this year.
Wal-Mart Stores Inc stock rallies to all-time high.
Walmart recently reported its third quarter FY 2018 earnings results. The earnings results were better than expected on several counts. Wal-Mart delivered beat on both top and bottom line. EPS stood at $1.00 per share, 2 cents higher than analysts' estimate. Walmart revenues in the Q3 2018 came in at $123.03 billion, 4% growth on yearly basis and $2.02 billion higher than analysts estimate. However, the most bullish part of Walmart's earnings report was the performance of its eCommerce business. For the second quarter in a row, Walmart's eCommerce business delivered 50% YoY growth. This sustained strong performance has driven Walmart stock to its all-time high. Walmart stock is up 39% for the year, its best performance since 1999. However, this is still lower than 58% return by Amazon stock in the same period. The question now is which is a better buy? Amazon stock or Walmart stock?
Amazon.com Inc will dominate the holiday sales.
Both Amazon and Walmart have delivered strong performance in the current quarter. Walmart has so far been successful in its online strategy, helped of course by Jet.com acquisition. This has helped the company to deal with the trend towards online shopping. Its eCommerce business has delivered strong growth. It now accounts for 3.6 percent of total U.S. online sales in the 12 months leading to October 2017, up from a 2.8 percent share a year ago, according to digital research firm eMarketer. On the other hand, though, Amazon accounts for around 45% of total U.S. online sales. Moreover, around 50% of the customers begin their search for products on Amazon, giving Amazon an edge over its customers. Amazon is likely to benefit more from the trend towards online shopping.
Coming to valuations, on the first glance Walmart stock appears to be much cheaper than Amazon stock. Wal-Mart stock is currently trading at a PE of 26x while Amazon is currently trading at a PE of 280x. However, you have to consider the growth prospects too. Amazon is expected to double its earnings by next year and triple it by 2019. On the other hand, Walmart is expected to deliver 5% growth in earnings. Walmart stock is trading at 54% premium to its 5 years average PE. The stock was recently downgraded by Goldman Sachs due to valuation concern. On the other, analysts continue to remain bullish on Amazon stock. And going by the weekend sales, it is likely to Amazon will continue to deliver strong growth in the coming quarter.
Battle for the "low price leader" title
The trend towards online shopping continued during the weekend. According to RetailNext Inc., which analyzes in-store videos to count shoppers, the number of people visiting U.S. stores on Thanksgiving and Black Friday fell 4% from last year. On the other hand, Adobe Insights, which measures 80 percent of online transactions at 100 major U.S. retailers, said a record $5.03 billion was spent online by the end of Black Friday, an increase of 17 percent from 2016. Both the companies are looking to profit from this trend.
With price remaining as one of the key differentiators for online sales, Walmart has been investing heavily to improve its efficiencies and reduce costs. Wal-Mart Stores Inc is within striking distance of matching Amazon.com Inc's online prices for the first time, a key milestone in its effort to regain the "low price leader" title. On average, prices on Walmart.com are now only 0.3 percent more expensive than Amazon, according to the study by retail data analytics firm Market Track. The firm analyzed prices of 213 products in 11 categories over a period of 700 days ending November 7, 2017. The reduction in cost has helped Walmart lower prices which in turn has driven sales.
Wal-Mart Store Inc's missed opportunity.
However, Walmart's Black Friday sales didn't go as planned. Soon after the company kicked off its Black Friday sales, customers started complaining about shortages. Customers couldn't buy what they wanted. One customer wrote: "At 2am Thursday morning you were out of some of the items already! Thought I would look this morning...sigh." While some view this as a positive development as it indicates a strong demand, this also indicates that Walmart was not adequately prepared for the Black Friday sales. The company lost out on the opportunity to serve the huge demand.
Amazon on the other had a great weekend. According to GBH Insights Amazon accounted for as much as half of all e-commerce dollars on Black Friday. Amazon's Prime subscribers are likely to be the main driver behind this strong performance. About half the U.S households have the Prime membership which gives them early access to discounts, free shipping, and exclusive deals. Moreover, the shifting trends towards online shopping will benefit Amazon more than Walmart as online sales still make up a smaller part of Walmart's total revenues. Total eCommerce sales during the holiday quarter may rise by as much as 20%. Going by the past weekend sales, Amazon stock is likely to be the winner in the current quarter.
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