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3 Disappointments in Walmart's Earnings

By Demitri Kalogeropoulos - Updated Apr 14, 2019 at 3:53PM

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Despite notching its best growth rate in years, the retailing titan sees plenty of room for improvement in the business.

Walmart ( WMT -1.22% ) just closed the books on a fiscal year that included several impressive operating wins. In particular, the world's biggest retailer notched its best growth rate at home in almost a decade thanks to market-share wins in areas like groceries and a booming e-commerce business.

However, in a conference call with investors, the management team's comments implied that Walmart is closer to the beginning of its transformation than it is to the end. "We fully expect the pace of change to accelerate in the next five years versus the last five years," CEO Doug McMillon told analysts. Below are a few of the biggest upcoming challenges the company wants investors to know about.

Integrating the sales channels

Following this past year's 40% spike, Walmart's e-commerce business has now doubled in just two years. Major improvements in 2019 included adding thousands of additional products to its inventory and cutting shipping times. Grocery pickup and delivery was a major priority, too, as pickup availability spread to 2,100 stores and delivery offerings reached 800.

A man shops for groceries.

Image source: Getty Images.

Walmart intends to only accelerate investments here. It aims to cross 3,100 pickup locations by the end of the new fiscal year while doubling the grocery delivery points. This initiative will contribute to the company's planned $11 billion of capital spending in fiscal 2020, but executives say the investments are essential to long-term growth. "We see the future as a frictionless experience across stores and e-commerce, but we have more work to do as customers raise their expectations, competition persists, and the omnichannel retail story continues to evolve," McMillon said.

Check out the latest Walmart earnings call transcript.

Making e-commerce profitable

Walmart's earnings results weren't especially robust, with consolidated gross and operating profit margins both declining for the year. In the core U.S. business, the chain's 2.3% operating income boost trailed the 4.1% growth in sales.

Executives didn't mince words on the subject, saying "we need to make more progress to improve profitability." Part of that improvement will come as the sales base expands over a more fixed cost profile. But Walmart buyers are also working with "a great sense of urgency" to increase sales in more-profitable product niches like home goods and apparel, CFO Brett Biggs explained. In any case, "we expect our losses in e-commerce to increase [in fiscal 2020]," Biggs said, "reflecting investments in infrastructure, people, [and] online grocery."

Stocking up inventory

Walmart credits much of its growth rebound to the company's ability to raise the bar on product quality lately. Better fresh and perishable food has driven market-share gains against rivals like Kroger, for example, and the chain is also winning with its massive private-brand program.

Executives aim to press their advantage here in the year ahead with help from partnerships with brands like Lord & Taylor and Advance Auto Parts. These successes should translate directly into improvements in the shopping experience, leading to higher shopper satisfaction. "Having a great store or site," McMillon said, "starts with having great merchandise."

The good news is that, while economic tailwinds provided a big assist, Walmart showed this year that it can generate solid returns even as it transitions into the world of multichannel retailing. Investors have to balance that success against the fact that the chain's challenges could get even harder in fiscal 2020 and beyond.

Summarizing their results, executives said they were pleased with what they accomplished last year, "but not satisfied." The fact that the stock has trailed the market by a wide margin over the past decade suggests investors are on the same page.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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