Walmart (NYSE: WMT), the world’s largest brick and mortar retailer, is due to release its earnings report on 18 August,2020. The retailer has been riding on wave since its stock price plunged to $104.15 in early March and reached $132.60 on 14 August,2020. With ever growing competition from the online competitors and changing consumer sentiment, will the company be able to sustain current stock price for much longer?
In Q1,2020, the company showed an impressive sales growth of 10.5%. Considering the scale of the pandemic and economic uncertainty, these are healthy numbers. However, as impressive as it may sound, the competitors did even better. Kroeger (NYSE: KR) reported 19% increase in sales revenue for the same period. Its online nemesis – Amazon (NASDAQ: AMZN), reported 26% increase in net sales. International operations also showed increase in sales (Walmex- 11.6%, China 13.3%, Canada - 7.6, and United Kingdom- 2.7%),however operational costs increased too, ending all key markets but Mexico with lower gross profit rates.
Walmart is on a track of reinventing the way it runs its delivery operations. In April 2020, the retailer launched its pilot express delivery program in selected areas. The idea behind is simple: the company will aim to deliver groceries in two hours or less. While simple to the end customer, it is far from being such operationally. The company hired 235,000 people to cope with the increasing demand.
With the economy further declining in the U.S. and in its key international markets, it is difficult to see how the company will be able to repeat the success it saw in Q1, 2020. Good sales results in Q1 were also partially due to sheer panic related to COVID-19. All retailers saw customers bulk buying and stockpiling to the levels never seen before. Ever growing competition from its smaller brick and mortar and online rivals means that the company needs to act fast. Any nationwide wide project that could deliver different shopping experience will require large capital expenditure, which would result in short/midterm reduction in profitability. It fells that the company is doing a lot of things reactively, instead of proactively. Improvements in its home delivery services could have been done a few years earlier rather than when the global pandemic landed.
We can expect to see a small drop in sales revenue in Q2, as the panic buying is over, and consumer spending is subdued. Operational costs will be higher too, mainly because of COVID-19 related policies, such as shopping floor traffic control, rapid withdrawal of members of staff testing positive, temporary pay increases (by $2.00) in its fulfillment centers and waived or reduced rent payments for the U.S. property partners. Walmart will remain a safe choice for long term investors that are more like to be able to ignore short term peaks and troughs. So far, the retailer kept relying on horizontal integration, by increasing the number of stores since its start. If it can successfully scale up its delivery services, we can expect more related offerings that would help to increase the value its shoppers get by using the retail behemoth.
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