The Most Impressive Part of Wal-Mart's Second-Quarter Report

In this MarketFoolery podcast segment, host Chris Hill and Aaron Bush of Motley Fool Rule Breakers discuss the latest report from the world's largest physical retailer, which featured 2% revenue growth. And while Wal-Mart (WMT -1.65%) is still opening new superstores, the fact that it increased e-commerce revenue by 67% year over year is of more interest -- even if that growth did come at a price. So where will it go from here?

A full transcript follows the video.

This video was recorded on Aug. 17, 2017.

Chris Hill: Let's start with Wal-Mart. Their second quarter profits and revenue came in higher than expected. Their online sales up 67%. The stock's still down a little bit today. But if nothing else, the online sales is growing -- it's not just that it's growing, it's growing significantly.

Aaron Bush: Yeah, and without a doubt, that's a good thing. The way I personally feel about this quarter is, I'm happy it wasn't awful. That's just because there's so much bloodshed out there these days, I'll take 2% revenue growth. I feel pretty good about that when it comes to a big box retailer. I mean, pretty clearly, 2% revenue growth, most of that was from comps and traffic increases. There were some price increases along with that. They opened 16 new supercenters over the past year, so, still growing. But I will give Wal-Mart credit for what it's doing in e-commerce. Over 60% growth there, it's impressive. Now, that is coming at a cost. We are seeing that margins are slipping, free cash flow is slipping. So, there is some cost to that growth. But they are making progress on that front.

Hill: But don't you think that they would prefer that trade? If you're Doug McMillon, the CEO, wouldn't you rather trade margins for putting up 67% growth, as opposed to, "Well, online sales grew 15%, but our margins held?"

Bush: Yeah. I think it's definitely important for them to take the short-term hits over a really big long-term hit, if they're completely unprepared in all of this. We were talking a little bit beforehand, they acquired Jet.com. Marc Lore, who ran Jet.com, now runs Wal-Mart's e-commerce operations. I think he's making the right moves here, and without a doubt improving the way that things are working. I also think, as the online transition occurs, it does inevitably slow down Wal-Mart's inevitable decline. But I'm still a little paranoid, still a little worried. But it's good to see things moving in the right direction.

Hill: And as you said, it's good to see this, not that we are wishing ill on any traditional bricks-and-mortar retailer, but I think, if I can speak for you, we're both rooting a little bit harder for Wal-Mart just because of how big it is. And, you mentioned to Jet.com acquisition, there were plenty of people including some in this building who, when they made that acquisition, threw up their hands and said, "What are they doing? Why are they spending $3 billion on that? It's not going to work." But, I think the combination, I'm already forgetting the guy's name from Jet.com, the founder there ...

Bush: Marc Lore.

Hill: Marc Lore, between him and the leadership of Doug McMillon, the CEO of Wal-Mart, they are moving it the way they need to.

Bush: Yeah, I think so. Just to touch on a couple things that I'm still a little paranoid about, I think this postpones some of Wal-Mart's decline. But I do think that over time, the majority of the shift has yet to take place and the ripple effects of what that means are going to be significant. So, for one, what we're seeing right now is that Wal-Mart is relying pretty heavily on acquisitions to boost its online offerings. Jet.com set the precedent, but they've made several other acquisitions, too, mostly on the smaller side. Shoebuy, Moosejaw, ModCloth, never heard of any of those, Bonobos. So, on one hand, I think that's smart, because that acquires new customers, sometimes from outside the Wal-Mart sphere, new data to work with, smart employees to bring in. But on the other hand, I just wonder how good of a job Wal-Mart will do to tie all of those together under the same roof. Aggregation is really important when it comes to being an e-commerce titan, and I'm just not sure if they'll be able to connect everything super well. I think that might be a stretch, but there's a lot of work left to do there. 

My largest concern, though, is infrastructure. Physical retail takes an entirely different approach to infrastructure than e-commerce does. It's just two completely different worlds. For one, we're already seeing the margins falling because Wal-Mart has to build brand new infrastructure to build its online capabilities on top of its physical presence. So, that's a much higher infrastructure cost to remain relevant to the same group of people. And as physical retail revenues transition into online revenues, that puts really big cost pressure on the physical retail infrastructure, the stores, the warehouses that are connected to that. So, I can totally see, over the next five to 10 years, Wal-Mart could knock it out of the park with their online successes, and keeping this momentum going. But what that means is, there's going to be some issues on the physical side, and they'll have to figure out what to do with underperforming stores and figure out how to shut things down or sell things off. And it could lead to more headaches.

Hill: I can't believe you've never heard of Moosejaw. That is as quality a name as you're going to get when you're in the business of outdoor gear, snowboarding, all that sort of thing. Moosejaw? Come on, that's a great name.

Bush: Maybe I just need to branch out some more, go on an adventure.

Hill: You know what? It's a lot better name than Bonobos, or however you pronounce that.