Why Walmart Is Winning in the Retail Space

In this episode of MarketFoolery, Chris Hill and Motley Fool analyst Jason Moser talk about the latest headlines from Wall Street. Discover how Walmart (WMT 0.46%) is winning in the retail space and some other retail news. A popular social media platform gets a new CEO. And there is also entertainment news and much more.

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This video was recorded on May 19, 2020.

Chris Hill: It's Tuesday, May 19^th. Welcome to MarketFoolery. I'm Chris Hill, with me, Mr. Jason Moser. Good to see you.

Jason Moser: Good to see you.

Hill: We've got some retail, we've got some entertainment news, we're going to start with Walmart. We're going to start with the biggest of the retailers out there.

Walmart same-store sales in the first quarter were up 10%, e-commerce sales were up 74%. They hired 200,000 workers, Jason. That's staggering.

Moser: It is. It was a good quarter, certainly, in what is a tough time. Some companies are clearly -- I mean, you hate to say benefiting from this, but the fact of the matter is, there are some tailwinds from this that some companies benefit from, and Walmart is definitely one of them. And I think, for the longest time, we saw e-commerce succeeding because of desire. It was people's desire to not necessarily have to go to the store to be able to have stuff just shipped to them. Now, obviously, the landscape has changed a little bit, even pre-COVID it was really more about becoming omnichannel. And I think that Walmart made a lot of good investments to become the omnichannel. And now, really, that business is succeeding out of necessity.

The landscape is considerably different, it's going to be different for some time to come. And I think this probably does shape consumer behavior to a degree going forward. People aren't going to just give up going out and going shopping anymore. But it really does show that the investments in becoming an omnichannel retailer are paying off for Walmart.

And just to look at some of the numbers. The topline, you mentioned, growing almost 10%, excluding currency effects. Let's put these numbers in perspective with what was going on in the same quarter last year. And if we look at last year in the same quarter, the U.S. comp sales for Walmart were 3.4% and that marked the best quarter one comp in nine years. And this year that comp number has, obviously, clearly grown considerably. I mean, we're talking about a company that grew their e-commerce sales 74% this year versus 37% a year ago. Talking about Sam's Club, comps up 12% versus 0.3% a year ago.

So, you're seeing a business that's clearly performing a lot better this year. Now, granted there is a catalyst, there is a reason for that, but I think that success is also because of all of the investments they've been making all along the way. And if you look at the five-year chart of the stock performance, I mean, that does make a lot of sense. That stock performance is really following along with all of the investments and the performance the business continues to chalk up.

Hill: They're not only hiring 200,000 new workers, they are also spending money, expanding benefits, employee bonuses. And as we expected, costs are going up in part because they are taking extra steps to make sure that the stores are as clean as possible. You know, you would expect that.

Moser: Yeah, you would expect that. We're seeing that across the board with big retailers. The operating expenses have gone up considerably this quarter, they're going to go up considerably here going forward. I think we are going to see the cost of doing business is just going to go up in perpetuity here. I think for retailers, for restaurants, any business that incorporates consumer traffic in some way, shape or form, just the cost-of-business is going up.

I think that when I look at Walmart today, my big question, I guess, when you look at what they said in regard to this quarter, they talked about the impacts of this quarter, they used the word "significantly." I mean, this quarter, this COVID-19 crisis is impacting their business significantly in both good ways and bad ways.

Now, it's one thing to be able to serve a role as they have as a part of the greater solution. And being able to get consumers what they want, when they want it; what they need, when they need it. It's one thing to get consumers into your world and use your services, using your store once or for a period of time, it's another question entirely to get people in there and keep them in there. And that's what we've seen for the longest time, we've always talked about companies like Costco and Amazon doing such a good job of not only getting those customers in there, but then keeping those customers.

And I think that based on the numbers that we're seeing Walmart continue to chalk up here quarter-in, quarter-out, it does look like they're doing a very good job of getting customers in and then keeping them in. I mean, this is a big market opportunity, we're not just talking about this new retail space being ultimately Amazon's to win or lose. I mean, as with most large market opportunities, there's room for multiple winners. And I think that Walmart is showing that they will be able to be one of the winners in the space.

I think noteworthy, they're talking about the fact they are going to be essentially phasing out the Jet.com brand. And if you look back to 2016, that was an acquisition they made, it was I think a $3.3 billion acquisition, most of that was cash. I think there was a little bit of Walmart equity tied to it, but generally speaking, that was just an all-cash acquisition. And I think at the time even, we recognized that was really less about the Jet brand and it was more about getting that talent in-house, to be able to build out an e-commerce operation and build out an omnichannel operation, where they were having some challenges really responding to all of the lines that Amazon had been throwing down at the time.

So, I wouldn't read into phasing out the Jet.com brand as a failure by any stretch. I think, honestly, we were all just kind of expecting that to happen. It doesn't mean that what they acquired from that deal is being phased out, it ultimately just means that they've integrated that acquisition to their satisfaction. And I think the numbers bear that out.

Hill: Last thing before we move on, I was talking to Bill Barker yesterday, we were talking retail, sort of, in the wake of the JCPenney bankruptcy news. And I floated the idea that, among the activity we could see in the retail industry the rest of this year and into 2021 is not just more bankruptcies of smaller retailers, but also potentially larger retailers, like, Target and Walmart making acquisitions, either of certain brands or just retailers outright.

When I look at this latest quarter from Walmart and how they're spending their money, that is clearly not top of mind for them, they are very much focused on everything they're doing with Walmart. And I don't think McMillan and his team are necessarily [laughs] looking to bring anyone else in.

Moser: No. And I agree, I don't think they really need to be worried about something like that. I mean, even they mentioned on the call, they said, our supply chain is among the most capable in the world, but even in this environment they know that they've stretched their supply chain.

Now, I think this particular time in history, this is proving to be one of the most stressful times for supply chain management for big supply chains. I think companies are getting up there and they're having the opportunity to prove their mettle. And I think in this case, what we're seeing in a very difficult situation is that Walmart has been able to pass that test with flying colors thus far. So, even, you've got management acknowledging the fact that this has been a stressful environment that they're stretching their supply chain.

And you look at their physical presence, they definitely have one of the more compelling supply chains around the world. And I don't think they need, really, to make any bolt-on acquisitions to support that. I think, more than anything, like the Jet.com acquisition was represented a few years back, I mean that was more about bringing in additional capability, a new way of looking at retail beyond just the physical presence that they've been so successful with up into this point.

Going forward, they really do seem like they have a great blueprint laid out, they were relying -- during the quarter, in the U.S., they were rolling out that shift from the store, they're temporarily right now filling orders placed on Walmart.com through about 2,500 of their stores around the country. So, I mean, they have all of the pieces in place, I think. And now they have the knowledge and the expertise in how to make all of those pieces work together and in harmony.

And you got to figure, if they're doing this good of a job in what is a considerably tough time, then I think they will have a lot of lessons to take out of this so that when things get a little bit easier they will be one of the companies, I think, that will be able to continue to, sort of, lead the way. Again, it's not going to be just them, you named off a lot of good companies with Target and Amazon, those are companies that are going to be a part of this as well, but it's nice to see that Walmart and Doug McMillon have done such a good job not only remaining relevant, but really helping to, sort of, blaze the trail for this new retail future that we're skating into.

Hill: So, shares of Walmart up a little bit today on this latest report, shares of Home Depot down a little bit, kind of a similar story, in that, first quarter sales for Home Depot up 7%, but just like Walmart, they are dealing with higher costs, because they are also looking to reward employees with bonuses, with higher pay and also increased cleaning costs.

Moser: Yeah. Just as much with Walmart, we're talking about big retailers that are worthy of investment dollars. Home Depot certainly falls in that category. Again, they've had a respectable year, if you look at the last five years, clearly the stock has been a winner and a good one for investors. And I think that is going to continue to be the case, because much like Walmart, they are doing a very good job of helping dictate, of helping shape this new retail environment. Granted they're a little bit, I guess, more of a specialized retailer in home repair and home improvement, but still obviously, as we've seen, that's a massive market.

And so, when we look to see how they've quantified those operating expenses that have hurt profitability in the near-term, they quantified that to the tune of about $0.60 per share for the quarter in helping employees during this stretch and helping alter business operations and helping just deal with the general chaos that's come from this.

So, operating expenses were up 17.1% for the year. I mean, you back that out and they actually brought in $2.68 earnings per share this quarter, which was really a tremendous performance in my opinion. If we look at those comp numbers, if you look at total comps, they were up 6.4%, U.S. comps were up 7.5%. If you go back a year ago, those numbers were 2.5% and 3%, respectively. So, clearly benefiting from some of the tailwinds created by the current situation. But this was a good, I dare say great business, before this all started. And I think this is only giving them the opportunity to really prove that.

And once things start to get back to normal, at least as normal as we can hope, that market is still going to exist. I mean, we're still going to have a housing market here in the United States that is aging very quickly. And a lot of these houses need home improvements, we're going to have people that have been holding houses off of the market, putting houses on the market, that's going to result in a lot of spend there as well. So, again, just a business we really like here at The Fool, one that's proven itself for a long time.

And you're getting $6 a year just to hang on to a share of this company. Sounds like a pretty good deal to me, Chris. [laughs]

Hill: It absolutely does. One thing I saw in the report that I was curious about, and wanted to get your take on was, Home Depot talked about how they've canceled major promotions that they had planned, sort of, you know, Black Friday-style events. That caught my attention, just because I don't think of Home Depot as a company that relies on promotion. Having said that, they are one of the steadiest advertisers across television, radio; I mean, they spend a lot of money on advertising. But I've never really thought of them as, sort of, a promotional event-driven business, have you?

Moser: No. But I think that probably, just that goes back to a point you made there, in that, they do offer up such a consistent advertising spend. I mean, you always hear their commercials on the radio, and you always see them on TV. And so, the ubiquity there, you probably just don't even think about the fact that they're throwing in a Memorial Day weekend sale or a Black Friday sale. That's a language maybe they integrate into the advertisement, but yet, they're not really dependent on that because the market that they pursue is so reliable.

Now, with that said, I also think a lot of these companies are probably going to be able to pull back on a lot of that promotional language in the near-term, because just the fact that life is going to get back to normal and these states are going to start opening their economies back up, that's going to be, like, promotion in and of itself, right? I mean, you don't need to add in promotional language to spur customers to get back out there and shop and spend, because so many people are ready to get back out of their houses and just do something; shop, spend a little bit.

So, I think they don't have to worry so much about that, and rather, they can focus their message more around things like safety and being part of this team, you know, we're all in this together, you hear that a lot. And I think that they can pull back on maybe some of that promotional language affiliated with specific events or weekends, and then just focus on the greater message.

And I think a lot of these retailers, and Walmart and Home Depot (HD 0.74%), you go through those earnings releases, I think they've done a very good job of incorporating all of the stakeholders in the language that they are using in these reports. I mean, they really are talking about how it's not just about business, I mean, it really does transcend business, it's about the employees, it's about the country, it's about people. And they're trying to be a part of these solutions, not only on the retail side but on the safety side, on helping everybody kind of get back up and running. And so, I think, the more they can focus messages around that and the less on individual promotional stretches of time, that probably creates a little brand equity there that doesn't hurt over the long haul.

Hill: We have a new CEO for TikTok, the video company, Kevin Mayer who was longtime executive at Disney, clearly did not get the top job [laughs] when Bob Iger stepped down, Kevin Mayer was Head of Disney Streaming, he oversaw the acquisition of BAMTech which is the company that makes the streaming tech that powers Disney+.

This is a good hire by TikTok, and the first thing I thought when I saw it was, oh, yeah, so TikTok is absolutely going to be going public at some point.

Moser: [laughs] Yeah, they may. I guess TikTok is owned by a bigger company. So, I don't know what the vision is there. Are you a TikTok user, Chris? I'm not a TikTok user, are you?

Hill: I am not. The parent company of TikTok is a company called ByteDance, which I've seen some private market valuations for ByteDance at around $80 billion to $90 billion. So, if those are accurate, I mean, TikTok is sort of the jewel in the portfolio for ByteDance. So, it's not unreasonable to think that it could get spun out, probably not this year, but next year or the year after at maybe somewhere in the neighborhood of $10 billion to $20 billion, depending on how valuations are when it finally does go public.

But, no, I am not a TikTok person. I'm not the target demo for that, [laughs] I don't think you are either, I think our kids are. And, you know, it's interesting, because the thing about TikTok, and maybe you had the same reaction the first time you saw it. My reaction when I first saw a TikTok video was, oh, it's like Vine. It's like Vine videos which were popular and then got killed for some reason.

And Kevin Mayer, look he wasn't going to stick around at Disney, this is probably just as -- I mean, not to say that this is great for Disney that he left, but he wanted the top job, he didn't get it. If you're Bob Chapek, you're probably happy for Kevin Mayer that he has found this opportunity. [laughs]

Moser: Maybe so, yeah. And I mean, you know, maybe this is a good thing ultimately for Disney, because you know one of the other effects of this is that Rebecca Campbell will be taking over for Mayer's position on the Streaming division, and she has served as the President of the company's Disneyland Resort in California here. And so, perhaps that ultimately is a good thing as well, so congratulations Ms. Campbell for that promotion there.

I think, for me, the first thing that comes to mind, whenever I think about TikTok, and given that what we know about social and how social has evolved is, I mean, this has me asking two questions. So, after TikTok, what's the next big thing? Because it does feel like it's just always about what's the next big thing. And TikTok feels like the next big thing right now. And when is Facebook going to try to acquire it? Because it does feel like Facebook at least tries to acquire everything that they think is the next big thing. And, you know, honestly that makes sense, I mean that's kind of what they're doing. We saw that they just acquired Giphy, which, you know, that's not really the next big thing, they're just a money-losing Gif engine or Jif engine, however you subscribe.

But I think that it's interesting to me, this line of work, this move here. You know, we've talked a lot about Iger's replacement. And ultimately bringing Bob Chapek in. And I think they did the right thing in bringing a Parks person in. And that feeling has been reinforced recently. We've been watching the Imagineering series on Disney+; I don't know if you've even been able to see that. I highly recommend it.

Even if you're not, you know, a Disney aficionado, it's really enlightening to see how this Imagineering side of the business works. And you get some good history there too. A couple nights ago, we actually watched the episode that focused on the Michael Eisner years. A couple of episodes that really focused on the Michael Eisner years. It was really interesting to see how his tenure with the company unfolded, because he really had it rolling early on, that right-hand man and President Frank Wells, it seemed like they could do no wrong.

And then they hit this point, Mr. Wells was unfortunately involved in a helicopter accident, he died. Eisner started making some questionable moves and all of these questionable moves really revolved around Parks and they were mainly international parks, but not all of them. But ultimately, we just saw, kind of as time went on, Eisner didn't really knock the ball out of the park when it came to building these parks experiences. And we know how important those parks are for the company, not only from a financial perspective, but really that's the most public-reaching part of this company, that's the experience, everything kind of flows from that parks experience.

You've either been to the parks or that's one thing you really want to do as a kid when you're growing up. And as a parent, you want to take your kids there, because you want to do everything you can for your kids. So, it shows how important the Parks system is, and I think it shows that they made a good move in bringing Chapek in.

And ultimately, I think that means for Mr. Mayer that this just wasn't really going to be a place where he can advance to do ultimately what he wanted to do, TikTok seems to be certainly more in line with his skillset. So, I think that's probably something that worked out well for everyone, but I really do feel like there was a neat history lesson there in that Imagineering series, going back to the Eisner years. Maybe part of that point in time helped dictate some of the decisions that were made today, steering this company forward for the next 10, 20, 30 years.

Hill: The other thing I thought of when I saw this news was about Snap (SNAP -4.04%) and how when Snap first went public, you and I -- I think it's fair to say we were skeptical [laughs] about Snap's prospects as a public company. It is hung in there. It's still trading for below its IPO price, but that said, it is still a $25 billion company. So, it is going to be interesting to see what happens next with TikTok. Do they make some additional moves that sort of telegraph, an IPO in 2021 or perhaps beyond that?

Moser: Yeah, I think with Snap, I think, very much like Twitter. I mean, you're starting to see that these really aren't the greatest businesses in the world on their own. And I say that as someone -- I still own a small position in Twitter and I've been noodling, actually, just kind of selling that and then moving on where I feel like maybe my investment dollars would be better served, because ultimately when it comes to the social space, it really is all about size and it's about having as many of those platforms under your umbrella as you can.

And it's not to say that what Twitter and Snap have done up to this point, it's not to say that that's not something you want to tip your cap to, because it is. I mean, these are billion-dollar businesses, of course. But I think they have a lot of challenges in the immediate future just based on the fact that we're always focused on what is next.

And I think for Snap, you know, you start looking at TikTok and you start wondering, how much traffic is TikTok going to take away from Snap? I think that's a very similar audience there. And so, yeah, I mean, what the future holds for those two businesses is going to be very interesting. I think Facebook is really in the catbird seat there, in that they are so big and they have so many different social platforms under their umbrella, but yeah, I'm sure that Mr. Mayer is going to have a lot of fun helping dictate TikTok's future.

And I think that we're also going to see, given the questions that revolve around TikTok from a security perspective. I mean, you have to at least acknowledge the fact that there are some questions regarding security, the nature of the platform spying, [laughs] and whatnot. I mean, you've seen that before, and certainly, our U.S. government wanted to bring executives from TikTok to testify and they said, you know, sorry, we can't do that, all of our executives don't live in the U.S., we live in China. Well, you know what, now, well, you've got an American CEO, so it'll be interesting to see how that unfolds. Maybe the politicians don't want to get out there and try to push these guys around a little bit in the near-term, and that presents a risk as well.

Hill: Jason Moser, thanks for being here.

Moser: Thank you.

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd, I'm Chris Hill, thanks for listening, we'll see you tomorrow.