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Walmart Up 10% -- Here’s What The Market Missed

By Motley Fool Staff - Aug 21, 2018 at 4:36PM

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Things look pretty rosy for Walmart, but it’s far from entirely sunshine and rainbows for the retail giant.

Walmart's (WMT 0.08%) earnings report really impressed the market with the company's 4.5% comp-sales increase, the 40% e-commerce growth, and more. But this quarter wasn't entirely peachy, and some of those pretty numbers came at a price.

Motley Fool contributors Ron Gross, Andy Cross, and Jason Moser go through the most important numbers and trends from the report, then talk about some of the less bullish indicators Walmart is flashing.

A full transcript follows the video.

This video was recorded on Aug. 17, 2018.

Chris Hill: But we begin with the newest growth stock in the public markets -- Walmart! Shares of Walmart up 10% this week after second quarter profits came in higher than expected. E-commerce sales in the U.S. up 40%, Andy. CEO Doug McMillan and his team crushed it. 

Andy Cross: Yeah, great investments that they're making in their business. I mean, growth stock might be a little bit bold, Chris. Their comp sales were up 4.5%, which was the best in 10 years. Traffic was up 2.2%, and their pricing was up 2.3%. They're really showing some progress on getting people to the store and getting them in the right products. 

What I really like about it, as you mentioned, the e-commerce business is accelerating. That was some concern, whether they could actually grow that e-commerce. They're actually having success there. They're making the right investments. They're going to be buying 77% of Flipkart, which is India's largest e-commerce platform. That will probably happen this quarter. Coming up, they own 10% of, China's second-largest e-commerce platform. They're making a lot of investments into the e-commerce space, and it's showing up in the top and bottom lines.

Ron Gross: Yeah, top line looks good. Unfortunately, there is more to the income statement than just the top line. We do see some margin pressure coming in here. There's a consistent price war in this space, everybody's racing to the bottom to lower prices to grab the consumer. Obviously, they're spending a ton of money to invest online. Increased commodity, increased transportation costs are taking a whack at margins. Operating income was actually down. So, I applaud them for what they're doing on the top line for the sales numbers, but it is only a piece of the story. There are a lot of costs associated with this business.

Jason Moser: I think Ron makes a good point there. There is more to the story. I do think, given the narrative over the past five years, it's really just been Amazon, Amazon, Amazon. It is great to see Walmart competing in this space. Frankly, competition makes these companies better, right? If you're going to go up against a company like Amazon, you'd better bring your A game. It seems like they're doing the best they can here, Walmart is. To Ron's point, they are constantly going to be playing that low-price game. I think that's where Amazon has, still, a leg up in. They've given people a way to value their time a little bit differently than we used to. It's not always about just having that rock-bottom low price. It's about convenience, it's about great service. And certainly, Amazon has helped set new standards there -- not to take anything away from Walmart. I think they're doing all of the right things. It's just a very competitive space.

Cross: I mean, they're bringing Ellen DeGeneres, right? There we go, the new denim line coming up, sub-$30 price points. The grocery pickups are now in 1,800 stores. To Jason's point, they are making these investments, they are trying to be more relevant, certainly, than they were over the last five years. You have to really applaud Doug McMillon and what he's trying to do there.

Gross: I'll say one more time, keep an eye on margins. If you're going to pay 19-20X earnings for a company like this, in a market that's only trading around 17X, they'd better start improving those margins.

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