What Walmart's 43% E-Commerce Growth Says About the Retailer's Game Plan

There was a period not so many years ago when the retail powerhouse that is Walmart (WMT 1.32%) was sputtering. No longer: When it reported on its most recent quarter this week, the top-line numbers were strong again, its online and omnichannel efforts clearly have momentum, and management gave full-year guidance an upward adjustment.

In this segment of the podcast, Market Foolery host Mac Greer, along with senior analysts Andy Cross and Ron Gross, discuss the company's strategic course, its delivery and pickup options, its Flipkart purchase, the short-term headwinds, and why the share price took a dip after what by most measures ought to be viewed as a positive report.

A full transcript follows the video.

This video was recorded on Nov. 15, 2018.

Mac Greer: Let's start with Walmart. Stronger-than-expected earnings. Eleven straight quarters of sales growth now. E-commerce sales up 43%. And Walmart raised full-year guidance. That all sounds great. And then I go and I quote the stock, and shares are down.

Andy Cross: Of course, one day, the stock price can move on a lot of reasons. The story here with Walmart, as we talked about last quarter, is really the e-commerce, the change that they're really trying to push ahead. Even the commentary -- there's so much conversation about the investments they're making in more sophisticated distribution. Warehouses, online grocery, delivery, grocery pickup is a big push for them. The e-commerce business, Mac, like you said, up 43% this quarter. That's an improvement of 40% last quarter, 33% increase the quarter before that, and 23% four quarters ago. A year-on-year improvement, and a continuing of the trend on e-commerce sales for Walmart. Continues to be impressive.

The stock reaction today, it's still kind of slow-growing. Sales are up 1.4%, 2.4% if you back out some of the currency. Maybe not quite so exciting. But really, for such a large company, they continue to make these investments to try to move the needle and, obviously, compete against Amazon.

Ron Gross: Yeah, a lot of good things to focus on in this report. I think the curmudgeonly traders out there today are probably focusing on margins that got hit a little bit due to higher transportation costs, rising e-commerce fulfillment costs. And actually, that's a good thing, because that means they're growing their e-commerce business. But nevertheless, it does come with higher costs. Profit is actually down 2%. It's hard to get excited about a report where profits are down from the previous period last year. I think that's probably what folks are focusing on. But I do like the raised guidance. I think that makes sense.

The stock has been all over the place this year. From February through August, it was a woof, as you like to say. But it's come back since then. Kind of flat year to date. Nothing really exciting coming from the stock. I like the raised guidance. Only 21 times earnings right here for a company that will probably grow in the low single digits. We'll see how that e-commerce continues to ramp.

Cross: They also closed the Flipkart acquisition, which is the Indian business which they competed a lot for. That's expensive, and it added to the debt pile for what they have. But that's an exciting investment to make. They're definitely not standing still, certainly not the Walmart story of even five years ago, with the investments they're making. And they have to, because it's so much more of a competitive space, with free shipping from the likes of Amazon and others who are not standing still. You have a company that's going to generate $15 billion or so in free cash flow. They're basically going to spend that all in dividends and share buybacks. It's really a return of capital story for investors.

The stock's reacted very nicely off the lows here earlier this year. At $100 now, it sells for about 21 times earnings. A slight premium to the market when you look at forward earnings. Probably not a ton to get excited about in the stock price. But from the business side, they're making the investments that are important.

Greer: And not curmudgeonly, right? You don't have to be curmudgeonly about it.

Cross: No, I don't think so.

Gross: Years ago, we used to talk about how they have to right-size the U.S. business. The U.S. business is everything we talked about. Now, they've got it humming along. International, though, isn't where they would want to be. Andy you mentioned the Flipkart acquisition, which I think is a really interesting one. Unfortunately, the CEO of that business unit had to resign following an allegation of sexual assault. Obviously, that throws a little bit of a monkey wrench into some works. They had to shed control of their Brazil operations. They merged their U.K. operations with a rival to focus on the U.S. business and their e-commerce business. So international is kind of floundering. They need to figure that out next, I think.

Cross: On the U.S. side, the comp growth of 3.4%, that's a 1.2% increase in traffic. More people coming into the stores. But a 2.2% increase on the average ticket price. That's a little bit higher than inflation. They actually are seen some benefits from some of the pricing mechanisms that they're putting forward. And that's an increase off of the 1.2% from last quarter. They are actually seeing some pricing benefits, which you don't really particularly expect to see from Walmart in this kind of environment.

Greer: Along those lines, let's talk about two areas of the business that really appear to be growing. Toys, benefiting from the Toys R Us bankruptcy, and groceries. By the end of the year, Walmart expects to be able to deliver groceries to 40% of the U.S. population.

Cross: If you look at my household, groceries and toys are pretty good spots to focus on, with two young kids. That's the bread and butter, trying to serve the customer base that Walmart wants to serve in ways that are more convenient. As Ron mentioned, they're investing in that. The new distribution center they've been working on in California will allow them to ship product goods at a 40% faster rate than the traditional distribution centers. A lot of investments, a lot of robotic investments going into the distribution center. Amazon's done this so well, Walmart is now playing catch-up. The groceries, we all buy groceries. I eat every day, Mac. And I've seen you eat almost every day.

Greer: It's not pretty.

Cross: And certainly Ron. It may not be pretty.

Gross: I don't like to miss a meal. [laughs]

Cross: [laughs] We all depend on food. It's a good spot for them to focus on, and trying to now meet the customers where they want to be met.

Gross: I love this quote. CEO McMillan said, "Walmart can offer fresh food within 10 miles of 90% of the U.S. population." That's pretty powerful.

Greer: And you're still curmudgeonly? Or are you coming off that?

Gross: This company and this stock are not going to knock the cover off the ball. But from a total return perspective, as part of the more conservative portion of your portfolio, I have no problem with it.

Cross: A 2% dividend yield. Don't expect fireworks, but certainly, over the last couple of months, it's been a nice performer for people who have held on.