Walmart (WMT 0.18%) delivered another strong earnings report on Tuesday, but there's no question which segment of its operations was the star in the fiscal 2021 third quarter.
E-commerce sales at Walmart U.S. jumped 79% year over year in Q3, making up 5.7% of its core segment's 6.4% comparable sales growth. That was a major driver in Walmart's strong overall performance as revenue rose 5.2% to $134.7 billion, ahead of analyst expectations at $132.2 billion. The company also saw consistent margin improvement across the business, and adjusted earnings per share rose from $1.16 to $1.34, also beating the consensus at $1.18 EPS.
Investors mostly shrugged off the news as the stock traded near flat on Tuesday after gaining nearly 30% year to date. This was another stellar report from the retail giant that shows its transition away from brick-and-mortar retail is accelerating.
The numbers above show that e-commerce has become Walmart U.S.'s main engine of growth during the pandemic, and management expects it to stay that way even after the crisis ends. Referring to e-commerce, CEO Doug McMillon commented, "We think these new customer behaviors will largely persist and we're well-positioned to serve customers with the value and experience they're looking for."
Walmart management looks beyond the pandemic
While it's clear that the coronavirus pandemic is driving much of the surge in Walmart's e-commerce sales, the company is also leaning into the online channel in multiple ways.
Pickup and delivery sales more than doubled in the quarter. Order pickup has been one of the company's big initiatives in recent years, and it now offers this service from 3,600 stores and same-day delivery of groceries and other products from more than 2,900 stores. Management has said before that 90% of the U.S. population lives within 10 miles of one of its stores, and it sees that base as an advantage over Amazon, since its stores can function as distribution centers for e-commerce delivery and as points for pickup of online orders.
Walmart's marketplace is also emerging as a bright spot in e-commerce, becoming its fastest-growing segment with sales more than doubling from a year ago. Marketplace sales have the benefit of generating higher margins as the company collects commissions on third-party sales, and that, along with an improved product mix, helped boost e-commerce margins.
Asked about where Walmart's e-commerce business stands today and the future opportunity, McMillon said,
We're just getting started. I think that's the end of the question. I mean, we have made progress and I'm grateful for the job that Marc (Lore) and John (Furner) and the team have done to build the big marketplace business, but we got a lot of upside in front of us and a lot of things that we can do to improve the customer experience and to drive the income for the company.
Clearly, the company sees a lot of growth ahead with e-commerce and its marketplace.
The company also launched a new membership program, Walmart+, which offers free delivery on combined purchases totaling at least $35 (as fast as same-day in some instances), use of scan-and-go checkouts in stores, and discounts on fuel -- all for $98/year.
As Walmart management has said before, it's thinking like a start-up. In addition to the new membership program, which has drawn comparisons to the Amazon Prime subscription service, Walmart is also testing drone delivery with Zipline, Flytrex, and DroneUp, and it has partnered with General Motors' Cruise division to test self-driving, all-electric vehicles for grocery delivery.
A new Walmart takes shape
During the quarter, Walmart made a number of big changes to its portfolio, selling subsidiaries in the UK, Japan, and Argentina in order to focus on growth markets like India, Mexico, and U.S. e-commerce. Plus, the company is angling for a greater piece of the healthcare market by opening new clinics in a handful of stores in Georgia. It's also launching its own insurance brokerage, leveraging its customer relationships to build a new business that connects customers with health insurance plans.
Taken together, these changes show that Walmart is moving beyond conventional retail and becoming increasingly focused on leveraging its store base to provide healthcare, e-commerce, and delivery services.
Investors ignored the results this quarter, and they may also be missing the broader story here. With its massive economies of scale, recession-proof business model , and unmatched store reach, Walmart is about as bulletproof a stock as there is. Its strong earnings report despite the coronavirus pandemic has helped show that. But its investments in areas like e-commerce and healthcare also make it a growth story, and that means the stock deserves a higher earnings multiple than Walmart has traditionally warranted.