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Walmart Gets Caught in the Late 2019 Retail Slowdown

By Demitri Kalogeropoulos – Feb 20, 2020 at 9:49AM

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But management sees a quick rebound for 2020.

Holiday shoppers didn't show up in the droves that Walmart (WMT -1.93%) thought they would. The retail titan this week cited sluggish demand in key product categories around Christmas as it revealed surprisingly weak sales growth to end its fiscal year. On the bright side, the company still notched an unusually strong fiscal 2020 and is predicting a quick return to faster growth.

Let's look at the results.

Woman holding multiple shopping bags and smartphone.

Image source: Getty Images

Sales growth slowed

Comparable-store sales gains slowed to 1.9% after having surpassed 3% for most of the last year. That result was below Wall Street's expectations and surprised the executive team. "We experienced some softness in a few general merchandise categories ... in the few weeks before Christmas," CFO Brett Biggs said in a news release.

A similar sentiment was expressed by Target (TGT -2.24%) last month, when the retailing chain reduced its holiday-quarter outlook. In both cases, the slowdown appeared to be limited to seasonal categories like toys, games, and consumer electronics. Walmart noted strength in its grocery segment and robust spending online, with the digital sales channel jumping 35%. The retailer ended up with 2.8% higher comps for the full year and a 37% increase in its massive e-commerce business.

Margins dropped

The profit picture wasn't impressive. Operating income fell 13% during the quarter and by 6% for the full year. That pressure came from a few areas, including the fact that seasonal merchandise carries higher profit margins than the consumer staples that dominate most of Walmart's nonholiday sales base. The company also noted a few cost headwinds such as higher labor expenses and temporary supply challenges in Chile.

Free cash flow landed at just below $15 billion, which was down year over year due to the combination of lower operating cash flow and higher capital expenditures. That shift contributed to lower direct returns to shareholders this past year, with dividends and share repurchases totaling $12 billion, or 13% below last year's result.

Looking ahead

The earnings pressure will continue into fiscal 2021, given that management plans to increase capital spending again and direct that cash toward more upgrades to its e-commerce fulfillment, especially by making deliveries quicker. Walmart also expects to shell out for store remodels and higher labor costs.

The good news is that the company expects to return to operating income growth in the core U.S. business this year. And management suggested that this past quarter's slowdown was just a temporary speed bump, predicting a year of "at least 2.5%" comps growth in 2021.

"We understand the factors that affected our results," Biggs said, "and remain confident in our business strategy." Walmart is expecting e-commerce sales to growth by 30% this year on top of last year's 37% boost, executives said. Now it's up to the company to show that it can achieve that ambitious outlook for fiscal 2021.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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