Retailer Walmart (WMT -0.65%) doled out $16 billion earlier this year to buy a 77% stake in Indian e-commerce company Flipkart. That decision might very well pay dividends for Walmart down the line, but for now, it's hurting the company's bottom line.
Walmart cut its full-year earnings guidance on Tuesday due to the impact of the deal. The company also now expects earnings per share to decline in fiscal 2020.
Image source: Walmart.
Short-term pain
Walmart still expects to grow total sales by about 2% this year adjusted for currency. And the company sees that growth accelerating to 3% in fiscal 2020, despite headwinds from Walmart Brazil and a planned reduction of tobacco sales.
The U.S. business is expected to continue performing well. Walmart expects both Walmart U.S. and Sam's Club to post 3% excluding fuel comparable sales growth this year and roughly the same growth in fiscal 2020 excluding fuel and tobacco. The international business will get a boost from Flipkart, with sales expected to rise by 5% in fiscal 2020.
But Flipkart is expected to take a toll on Walmart's earnings. The company lowered its full-year adjusted EPS outlook to a range of $4.65 to $4.80, down from a previous range of $4.90 to $5.05. In fiscal 2020, Walmart sees this metric declining by a low single-digit percentage. If Flipkart is excluded, adjusted EPS would rise by a low- to mid-single-digit percentage in fiscal 2020.
An e-commerce slowdown
The U.S. e-commerce business will slow down a bit in fiscal 2020. Walmart sees 35% growth, down from the 40% growth the company expects this year. Walmart has invested heavily in e-commerce over the past few years, but it has taken some steps recently that might be hurting overall sales growth. The Wall Street Journal reported in August that Walmart had started displaying "out of stock" statuses on products too expensive to ship profitably. And earlier this year, Walmart reportedly told suppliers to focus on items priced at more than $10, a move that could boost e-commerce profits but hurt sales.
Part of Walmart's e-commerce strategy is online grocery delivery and pickup. The company plans to offer grocery pickup at 3,100 stores by the end of fiscal 2020, with grocery delivery available at 1,600 stores. Grocery pickup was available at 1,800 stores at the end of the second quarter, so Walmart plans to nearly double the availability of that service.
In addition to competing with Amazon, Walmart is facing off against a newly aggressive Target (TGT 1.28%). Target has rolled out free two-day shipping, a next-day home essentials delivery service, and same-day grocery delivery this year. The retailer has also been lowering its prices, an effort that includes the new Smartly brand of low-cost household items. Target is growing its own e-commerce sales at a 40% rate, and it's using its stores to fulfill most online orders.
Walmart's expected 35% e-commerce growth is still a solid number. Amazon's first-party online sales, which exclude its vast third-party marketplace business, only grew by 12% during the second quarter. Walmart can eventually catch up to Amazon on that front if it can keep its growth rate up.
Taking it in stride
Shares of Walmart opened higher on Tuesday, so investors don't seem to mind the lowered earnings guidance and the e-commerce slowdown. The Flipkart investment is a long-term bet on India, and investors might be willing to accept lower profits today for potentially higher profits tomorrow.
Walmart hosts its annual meeting for the investment community on Tuesday, and CEO Doug McMillon will go into more detail on all the company's initiatives. Third-quarter results will follow on Nov. 15. The stock is down slightly this year after surging about 55% since the beginning of 2016. With shares now trading for about 20 times the midpoint of Walmart's full-year adjusted earnings guidance, further gains might be elusive until earnings growth returns.
