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Walmart Tells Investors Why Growth Will Rebound

By Demitri Kalogeropoulos - Feb 25, 2020 at 12:30PM

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The retailing giant issued a bright outlook for 2020 despite last quarter's slowdown.

Walmart (WMT 0.11%) recently announced sluggish fourth-quarter results that took away from an otherwise stellar fiscal year. The retailing titan's holiday sales period was its weakest of 2019, yet revenue and customer traffic gains were still among the best results the business has put up in a decade.

CEO Doug McMillon and his executive team said in the earnings release that they have a good handle on what went wrong during the quarter and sought to assure investors that the challenges are likely temporary. In an investor presentation, executives went into detail about the chain's hits and misses while explaining some key points about Walmart's outlook for the new fiscal year.

Let's look at some highlights from that presentation.

A woman checks her phone while shopping.

Image source: Getty Images.

Hits and misses

We believe the compressed holiday season, softer toy industry sales, a lack of newness in [video] gaming, and some assortment challenges in apparel contributed to the decline.
-- McMillon

Walmart's general merchandise category declined over the holiday period, and that dip offset robust sales growth in the grocery and health and wellness sections to push comparable-store sales gains down to 1.9% from the 3%-plus rate the company enjoyed through most of 2019. Management blamed consumers' reluctance to make purchases in typically strong categories like video gaming and toys.

On the plus side, the retailer's grocery division grew at nearly its fastest pace in a decade, supported by major investments in the fresh food aisles and by the launch of hundreds of additional same-day delivery and pickup points.

Putting the slump in perspective

On a two-year stacked basis, comp sales were up 6%, marking growth by at least 6% for six of the last seven quarters.
-- McMillon

Zooming out gives investors a more informed picture of demand trends than concentrating on just a single quarter, according to the management team. To illustrate that fact, they explained that two-year stacked comps in the U.S. segment, which describe the annual growth rate over two successive fourth quarters, was 6% -- just as it has been for more than a year.

Customer traffic is another metric that supports this bullish reading of the business, as it increased 1% in the quarter and was up significantly for the full 2020 fiscal year.

About that profit drop

Excluding the impact of discrete items, we would have delivered 9 basis points of [operating margin] leverage for the fourth quarter and 17 basis points of leverage year to date.
-- McMillon

Walmart reported a 6% drop in operating income for the year, thanks in part to a 12% slump in the fourth quarter. Management explained that most of this drop was due to unusual charges, including economic disruption in Chile and the U.K.

Adjusting for these events and currency exchange moves produces a more modest 1.9% operating income decline that's mainly due to Walmart's elevated spending in areas like the grocery segment.

Looking ahead

We feel good about the quality of our inventory position as we enter the new fiscal year.
-- McMillon

Walmart projected comps of "at least 2.5%" for fiscal 2021, which implies that the fourth-quarter slowdown will be just a temporary aberration in its growth rate. E-commerce gains will be a big part of that boost, and executives also said they're expecting that segment to increase profitability after stabilizing last year.

And in case there was any doubt about what management sees as its core competitive advantage, Walmart reiterated plans to spend $11 billion this year on a range of growth initiatives, including adding more same-day fulfillment capabilities, improving store layouts, and upgrading the supply chain.

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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