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  1. Home
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  3. / Stocks

Walmart's Keys to Growth: Selling Big Globally and Online

With WMT's U.S. dominance, these are the two big waves of momentum it needs to ride to revalue shares in the long term.
By KEVIN CURRAN Aug 15, 2019 | 02:21 PM EDT
Stocks quotes in this article: TCEHY, BABA, AMZN, WMT, JD

Walmart's (WMT) U.S. sales are an absolute fortress, relying on the strong consumer that continues to buoy results. But to unlock significant growth, the company will need to navigate both international markets amid a less-than-favorable macro environment and its ongoing tussle with Amazon (AMZN) for e-commerce dominance.

And investors will need to watch the two closely.

Shares of the Arkansas-based retail giant are bouncing over 4% to the upside in afternoon trading on Thursday, trending towards the largest one-day gain for the stock since its post-Christmas recovery.

Much of the upside action results from strong U.S. sales, comparable sales, and raised guidance, as well as an ability to mitigate supply chain risks as is characteristic of the strong management team.

Yet, the company's increased focus on building out e-commerce and international exposure to major population centers are perhaps the most promising factors for longer-term investors as traditional U.S. brick-and-mortar dominance appears cemented.

The company reported positive comp sales in nine of 10 international markets for the second quarter, including China.

While Canada and the UK were noted for weakness in net sales, the strong performance in the more politically tenuous markets is certainly encouraging. That is especially so as results from Alibaba (BABA) bear out sustained strength in Chinese consumers.

"Customers [in China] love our Sam's Club format where we saw double-digit comp growth, led by strong growth in fresh and dry grocery," CEO Doug McMillon said. "In addition to Sam's, we're continuing to invest in e-commerce."

He cited increased exposure through both the company's partnership JD.com (JD) and increased investment in Tencent's (TCEHY) WeChat app as key drivers for convenience-focused Chinese consumers.

"We're excited to offer customers new ways to shop, and with the ability to link to our other services in WeChat, such as Scan and Go and Find My Item, we're encouraging customers to shop with us across our stores and online," McMillon added.

Further, the company noted that the Flipkart integration is progressing positively and allowed for a bettered guidance figure on sales to offset some Brazilian difficulties.

While the acquisition remains a short-term drag on operating income, the prospects of the No. 1 e-commerce player in the burgeoning market is a prescient factor to monitor in coming years.

Still analysts, while overall positive, remained reticent to make the bull case on international as macro trends, tariffs, and slowing Canadian and British markets weigh on the outlook and could provide for better entry points in coming months.

"We overall look very favorably upon another solid print from WMT," Oppenheimer analyst Rupesh Parikh said. "Momentum in the international segment is waning a bit as management trimmed full-year expectations citing macro challenges."

Indeed, the company did lower its full-year international net sales estimates by 1% as uncertainty abounds even after a tariff delay earlier this week.

Nonetheless, he echoed the widespread confidence on Wall Street in Walmart management for longer term investors.

"WMT continues to execute quite well, he concluded. "Valuation represents our only sticking point currently on the name."

Going Online

The upper-hand that e-commerce and online capabilities have carried through in retaining growth in international markets like China and India is of course another major factor for the largest brick-and-mortar name in the market, extending beyond those emerging opportunities to the broader base of business.

"In e-commerce, sales growth of 37% reflects strength in online grocery and Walmart.com," McMillon told analysts. "We're making progress to improve the fundamentals of our traditional e-commerce business, including the Consumer Value Index (CVI) score and Net Promoter Score (NPS)."

He noted that despite near-term drags on the build out of next-day delivery and online capabilities, especially on margins, the company is making progress on gross margin and variable costs.

"We've quickly grown this piece of the business in recent years, and I know we can do even more as we look ahead," McMillon added. "You've heard us talk about our NextDay delivery offer that launched a few months ago. We set an original goal of serving about 75% of the U.S. population by year-end. I'm pleased to say that we've already reached that annual goal, and we're working to expand it even further, including the available assortment."

The consumer pickup of the offering was cited as a major positive and the company is continuing to improve the economics of the effort as freight and shipment costs fall.

Online grocery in particular was also noted as a key contributor as consumer trends shift and the company remains the largest grocer in the U.S.

"Having stores close to customers is a competitive advantage, and we're leveraging that to provide convenience through grocery pickup and delivery, pickup towers, and the in-home delivery test that will launch this fall," McMillon said. "Customers want options in how they receive goods, and we are the best positioned in the industry to provide choices through our omni-channel offering."

At the very least, the rollout of new capabilities this fall could serve as a catalyst to monitor in coming quarters.

To that end, the company has shown success in Mexico already, with e-commerce sales accelerating 50% year-over-year led by food, provoking the company to invest in numerous new fulfillment centers in the country.

If the buildout of Mexican e-commerce capabilities can provide a road map to growth in other markets, the future certainly looks bright.

Long-Term View

As a word of caution, the company will be lapping difficult compares in the fourth calendar quarter and the buildout of NextDay delivery services remains a headwind.

The company is also telling investors there could be some difficulty in international growth as the politics of trade and the economics of many markets evolve seemingly day to day. The conservatism here is likely a strong suggestion of how to position in the stock.

Lastly, the integration of FlipKart remains not totally fulfilled, no matter how large the upside is.

With the valuation stretched on Thursday, it would likely to be best to await a pullback in shares or an inflection in these movements to begin pressing positions.

Still, for long-term investors, few stocks appear safer amid the noise than the bully of Bentonville.

For more on how pros are playing the name, click here for a trading strategy and here for an options play.

Amazon is a  holding in Jim Cramer's Action Alerts PLUS member club.

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TAGS: Earnings | Investing | Stocks | Consumer | Retail | E-Commerce | China | India | Mexico | Stock of the Day

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