Walmart (WMT -0.32%) may enjoy a soft landing in 2021 after all. The world's biggest retailer this week revealed slowing growth as it begins to go up against some of the biggest pandemic-related demand spikes from a year ago. But the deceleration was modest, and executives said they like what they're seeing around consumers' propensity to spend right now. These positive trends have the discount chain predicting more growth ahead in Q2 and for the rest of the fiscal year.
Let's dive right in.
Growth held up for Walmart in Q1
As expected, sales gains slowed as comparable-store sales growth hit 6% compared to the 9% increase Walmart enjoyed through 2020. Yet that expansion came on top of a huge spike a year ago, when consumers were busy packing their pantries during the initial phase of economic lockdowns around the world. Stepping back, revenue trends are still strong, with comps rising 16% over the past two years.
Walmart said the boost was supported by federal stimulus measures and from pent-up demand across both discretionary and consumer staples niches. "Every segment performed well," CEO Doug McMillon said in a press release, "and we're encouraged by traffic and grocery market share trends."
Customer traffic remained negative at stores, but the 3% drop in Q1 was a big improvement over last quarter's 10% slump. And that pressure was easily offset by higher spending per visit, along with booming demand in the online niche. Digital sales have now doubled over the past two years.
Walmart cashed in on the rising sales volumes, with higher prices and lower expenses combining to push gross profit margin up by a full percentage point. Operating income surged, rising 27% in the U.S. segment.
These wins should ease a few investor worries around inventory management and supply chain challenges. Walmart wasn't bogged down by any shipping bottlenecks, after all, and handled some wild demand swings. Its apparel and home furnishings segments were standouts, with 20% growth helping lift overall profitability thanks to higher margins on categories like sporting goods and outdoor furniture.
Management said it is a challenge to forecast short-term sales and profit trends in this environment. That problem will get harder in the second half of 2021, too.
But the bigger picture is positive. Walmart modestly raised its outlook for the second quarter and for the wider fiscal year on both sales and operating income. "We anticipate continued pent-up demand [benefits] throughout 2021," McMillon said.
Walmart still plans to spend over $14 billion on the business this year, representing a huge increase over a normal year. That fortune will go toward typical projects like remodels but is mainly aimed at building a stronger infrastructure to support its elevated sales volumes -- especially in the online business.
The chain has added over $30 billion to its annual revenue footprint over the last year, without significant growth in its store base. That extra volume requires a more robust supply chain and online delivery platform.
Yet investors are likely to see solid long-term returns from Walmart's $14 billion spending spree. In the meantime, its operating results are set to improve in 2021 even following last year's surge. That all implies good returns for holding this retail stock, which has gotten cheaper relative to the market since the start of the pandemic.