Walmart Reports Slowing Growth in Its E-Commerce Business

Investors pummeled Walmart shares Tuesday after the retail behemoth reported disappointing fourth-quarter earnings in results that revealed growing pains in its e-commerce buildout.

Walmart suffered one of its worst days ever on Wall Street, plunging 10.2 percent to close at $94.11 (roughly Rs. 6,100), its biggest one-day decline in percentage terms in more than 30 years.

The company reported another solid quarter of gains in US comparable store sales, but quarterly earnings slumped 42.1 percent to $2.2 billion (roughly Rs. 14,200 crores).

Earnings were dented primarily by investments to keep prices low and by the effects of online sales of lower-margin items, chief financial officer Brett Biggs said.

Walmart also reported much slower growth in e-commerce sales than in the prior three months

Questions about Walmart's e-commerce strategy dominated a 60-minute conference call with analysts, but chief executive Doug McMillon insisted the company was making progress in its efforts to compete with Amazon and others.

"We're confident in our strategy to transform the company," McMillon told analysts in a conference call. "It's really about providing more convenience to customers."

The retailer's initiatives to compete in the online shopping world have included acquisitions of Jet.com, smaller entities like the men's line Bonobos, and a joint venture with the Lord & Taylor department store chain.

Walmart US saw e-commerce sales increase 23 percent in the fourth quarter, much slower than the 50 percent jump in the third quarter. But the company said the growth rate would improve and is expected to increase by around 40 percent this year.

Most of this slowdown was due to the accounting of the Jet.com acquisition, but McMillon also said some of it was because of "operational challenges," such as difficulties managing inventories at holiday time between the mix of items such as toys and electronics and everyday consumer staples.

Enough progress?
McMillon said the retail giant would accelerate efforts such as "scan and go" and double its online grocery offerings in the US in 2018. Moreover, he said the company was gaining mastery of a business that is crucial but still small given the company's overall size.

E-commerce accounted for $11.5 billion (roughly Rs. 74,500) of Walmart's US sales last year, less than four percent of total revenues for the business.

"Our visibility into picking costs, shipping costs, margin rates, the costs to acquire a customer, and how the different cohorts are behaving as we make the marketing investments is really improving," McMillon said

The company could make further acquisitions in an effort to provide goods that would enhance e-commerce profitability, and will split the labelling of its online presence by region and customer type.

The company would brand its e-commerce under "Walmart" in Oklahoma and Texas and other regions where the brand is familiar, and as Jet.com in New York and other markets with "urban, millennial, higher income customers," McMillon said.

A JPMorgan Chase note called the retailer's results disappointing in light of the "e-commerce narrative around the stock."

But Neil Saunders, managing director of GlobalData Retail, said he was "not overly concerned" with the slowdown, and praised Walmart for thinking long-term and having the willingness to bite the bullet and spend additional dollars to compete with Amazon.

"There are many demographics, especially younger and professional segments, for whom Walmart is not the destination of choice online," Saunders said. "This is a tough nut for Walmart to crack, and one that it can only break by more heavily marketing its services and proposition."

"Walmart needs to invest in evolving and adapting. If it doesn't, it will become irrelevant. In so doing, it is following the same strategy as Amazon: taking less profit today, for the prospect of a stronger, better business tomorrow."