How do you transport a dozen eggs, covering a distance of over a mile in just 30 minutes, and safely deliver them without a single crack? This isn’t a hypothetical physics problem, but a real challenge that Walmart (ticker: WMT) has successfully tackled through its drone-delivery rollout.
In collaboration with companies like DroneUp, Walmart’s drones follow optimized routes to ensure minimal disruption to the public. These advanced drones carefully lower products, including delicate eggs protected by specialized cushioning, to a specific location on the customer’s property, before returning to their launchpads. Currently available in three dozen stores across seven states, including Florida and Texas, this innovative program highlights Walmart’s commitment to leveraging technology to improve its core business and explore new, highly profitable endeavors.
With the ever-increasing popularity of options like rotisserie chicken and Red Bull, Walmart’s drone-delivery service caters to the evolving needs of its customers. This initiative also serves as a proactive measure against competing giants like Amazon.com (AMZN), which has its own fleet of drones.
The pandemic has acted as a catalyst for the retail industry’s adoption of technology, from automation to artificial intelligence. Walmart, in particular, has witnessed exponential growth in its global e-commerce business over the past three years. However, this technological transformation hasn’t come without its fair share of challenges. Retailers face constant pressure from digitally native businesses and encounter significant costs associated with software development. Moreover, today’s consumers have increasingly high demands when it comes to speed and convenience.
To stay ahead in this rapidly evolving landscape, Walmart is compelled to remain at the forefront of innovation. The good news is that, despite initial difficulties, the company has demonstrated both financial strength and a culture of experimentation necessary to thrive in this new era.
Walmart’s Remarkable Transformation
Walmart, the world’s largest company by revenue, has undergone a remarkable transformation in recent years, greatly improving its competitive performance. According to John San Marco, portfolio manager of the Neuberger Berman Next Generation Connected Consumer exchange-traded fund (NBCC), Walmart has successfully distinguished itself in the omnichannel space while maintaining its reputation for offering great value to consumers. In essence, Walmart has future-proofed its business.
However, this success was not always guaranteed. In the mid-2010s, Walmart, like many other traditional retailers, faced significant challenges as Wall Street shifted its focus away from brick-and-mortar stores. The company’s stock took a hit during this period, losing over a quarter of its value in 2015 alone, while Amazon experienced exponential growth.
Walmart initially had mixed results in its efforts to establish itself as a dominant force in e-commerce. It made high-priced acquisitions of popular digital brands like Bonobos and ModCloth, only to sell them later at a significant loss. Additionally, its acquisition of online retailer Jet.com for over $3 billion in 2016 was ultimately seen as an expensive misstep. However, it did bring Walmart the expertise of co-founder Marc Lore, which proved crucial during its e-commerce development. Despite these challenges, Walmart managed to maintain its earnings per share above $5 in fiscal 2015 but struggled to reach the same level again until fiscal 2021. At one point, it seemed uncertain whether Walmart would successfully transition into the digital age.
Nevertheless, Walmart has proven itself to be a resilient and adaptive company. It embraced the lessons learned from its trial-and-error phase in e-commerce and managed to find a winning formula just in time for the surge in online shopping driven by the Covid-19 pandemic.
Walmart’s Success: Leveraging Size and Footprint
As a leader in the retail industry, Walmart has managed to excel by capitalizing on two key strengths that set it apart from its competitors: its expansive size and widespread physical presence. With 90% of Americans residing within a 10-mile radius of a Walmart store and regularly engaging with the company, Walmart utilized this advantageous ubiquity to its fullest extent during the pandemic.
To navigate through the challenging times, Walmart intensified its curbside and in-store pickup services. By utilizing their stores as distribution hubs, Walmart successfully reduced costly shipping expenses. The significant savings derived from this strategy allowed the company to allocate resources towards store upgrades and automation. Moreover, Walmart’s substantial scale granted them substantial bargaining power with suppliers, enabling them to maintain lower prices compared to their competitors.
Additionally, Walmart swiftly expanded its online advertising business and established a thriving third-party marketplace. The synergistic effect of these initiatives propelled the company forward, resulting in impressive growth for its U.S. e-commerce business. Since fiscal 2020, Walmart’s e-commerce sales skyrocketed by an astounding 122%, reaching an impressive $53.4 billion in the most recent fiscal year. This represents nearly 13% of the company’s total U.S. sales.
As a result, Walmart is now poised for digitally-driven profitability. With forecasted earnings per share projected to reach an all-time high of $6.91 in fiscal 2025 (compared to an estimated $6.24 for fiscal 2024), the company has transitioned away from extensive investments in e-commerce development.
According to Connor Martin, a research analyst at Vontobel Asset Management, “The company went through a multi-year period of testing and developing the e-commerce space, and now we’re seeing a shift where it no longer really needs to do as many significant investments.”
Walmart’s innovative strategies have placed it in a position of strength and positioned it for continued success in the rapidly evolving digital landscape.
Walmart’s E-Commerce Learning Curve
Walmart’s journey in the e-commerce world reminds us of its success in developing the grocery business. Just as grocery sales didn’t initially thrive in every market or store type, Walmart persisted in refining its strategy. Eventually, they discovered the winning formula that made their massive supercenters the go-to destination for a variety of food and drinks. This strategic assortment of groceries turned Walmart into a one-stop shop for many Americans. Moreover, they managed to achieve remarkable profit margins in an industry known for its narrow margins. Walmart also invested in fast-growing categories such as organics, persuading shoppers to make additional discretionary purchases during their grocery runs.
Once Walmart grasped the correct approach, they implemented it on a wide scale, both online and in-store. Today, grocery sales account for a staggering 60% of Walmart’s total sales, surpassing even the likes of Amazon. In fact, their dominance extends to Target’s (TGT) home turf in the Twin Cities.
Walmart’s ability to excel in this area is a testament to their process: experimenting with a concept, enduring some decline in margins, and eventually finding tremendous success. The company’s supercenters and food business wouldn’t have reached their current level of dominance without investing time to refine their approach. Drawing parallels between then and now, we anticipate significant improvements in profit margins in the near future.
Walmart’s Profitability Showing Promising Signs
Analysts are optimistic about the future profitability of Walmart, as the company seems to be turning a corner. While Walmart’s EPS fell 2.6% in the most recent fiscal year, its revenue increased by 6.7% over the same period. However, projections indicate that this gap will narrow in the coming year. It is expected that EPS will only fall by 0.8% from the previous year, while revenue is predicted to rise by 4.2%. Furthermore, experts foresee a reversal of this trend by fiscal 2025, with a projected sales increase of 3.7% to a record-breaking $660.1 billion, resulting in an impressive 11% jump in bottom-line growth.
Edward Kelly, an analyst at Wells Fargo, describes Walmart’s current situation as the “early stages of a multiyear margin inflection,” affirming that the company is undoubtedly on the path to success.
Walmart’s success cannot solely be attributed to selling more products to a larger customer base, although that is certainly part of it. The company has successfully attracted younger and higher-income consumers in recent years by offering competitive prices during a time of historical inflation. Additionally, the convenience of Walmart’s subscription service, Walmart+, has played a significant role in their accomplishments. Although specific user numbers have not been disclosed, it is estimated that Walmart+ has approximately 20 million members and costs users around $100 per year.
The Changing Landscape for Walmart
Walmart, unlike the savvy deal hunters during the financial crisis, is now focusing on retaining its new customers. The company is not only renovating its existing stores but also expanding with the addition of more than 30 new outposts this year through Sam’s Club, its warehouse division. The ultimate goal is to entice customers to make purchases both online and in-store. The result? Omnichannel shoppers, who are known to spend two to three times more compared to those who solely shop in-store. Moreover, these customers also tend to shop twice as frequently.
One way Walmart is achieving this objective is through Walmart+. This service offers free shipping among other benefits. Another success is the company’s revamped website, which has garnered positive reviews from the tech press that have compared it favorably to Amazon’s. Customers are also flocking to the third-party marketplace on Walmart’s website, where a staggering 400 million items are available.
Interestingly, this marketplace also supports a high-margin online advertising business. In fiscal 2023, this segment experienced a remarkable revenue increase of nearly 30%, reaching $2.7 billion. The growth has been phenomenal, surging over 30% in the most recent quarter alone.
Apart from boosting ad revenue and sales, Walmart’s online presence has resulted in a wealth of valuable customer data. This invaluable information enables Walmart to tailor its offerings, with a special focus on guiding shoppers towards more lucrative discretionary categories.
The rise of retail ecosystems has caught the attention of analysts like Oliver Chen from TD Cowen. He believes that Walmart’s platform has the potential to diversify income streams while concurrently driving increased sales of general merchandise. Not many legacy retailers possess the financial resources to make this transition successfully; hence Chen asserts that Walmart’s shares should be valued at $180.
However, Walmart is well aware that it needs every competitive advantage it can secure in order to thrive in today’s rapidly evolving market.
Walmart vs. Amazon: The Battle for U.S. Retail Dominance
In a surprising turn of events, J.P. Morgan has raised concerns that Amazon might surpass Walmart as the largest U.S. retailer in the coming year. This revelation comes at a time when many Americans – particularly Walmart’s core lower-income shoppers – continue to grapple with the lingering effects of inflation. Moreover, retailers find themselves caught in the crossfire of a culture war, as conservative customers voice their opposition to merchandise related to the LGBTQ+ community.
Despite these challenges, Walmart’s most recent earnings report demonstrates that it is reaping the benefits of consumers’ unwavering quest for value. Unlike its competitors, including Target and dollar stores, Walmart excels in capturing the attention of price-sensitive shoppers up and down the consumer market. If these customers remain loyal to Walmart even after their discretionary budgets ease, there is a strong possibility that Walmart will become the benchmark for both affordability and convenience, thanks to its exceptional omnichannel infrastructure.
However, there is another noteworthy factor in Walmart’s success story: automation. Behind the scenes, Walmart has perfected an automated supply chain system on a scale that few other retailers can match. This system combines its physical stores’ role as shopping destinations with their function as distribution hubs. Strategically positioned warehouses within its stores utilize robot pickers to handle mundane and laborious tasks, leaving human workers free for more engaging responsibilities. This streamlined approach minimizes errors, improves inventory management, and ensures that online customers do not compete with in-store shoppers for products or staff attention.
With these strategies in place, Walmart is poised to maintain its dominance in the retail industry. However, Amazon’s relentless pursuit of innovation makes it a formidable challenger. As the battle for U.S. retail supremacy intensifies, only time will tell which giant will emerge victorious.
Key Points:
- J.P. Morgan warns that Amazon could overtake Walmart as the largest U.S. retailer next year.
- Inflation continues to impact lower-income shoppers who rely on Walmart.
- Conservative customers express dissatisfaction with LGBTQ+ merchandise sold by retailers.
- Walmart outperforms competitors in capturing price-conscious consumers.
- Walmart’s omnichannel infrastructure positions it as a leader in both value and convenience.
- Automation plays a crucial role in streamlining Walmart’s supply chain and reducing errors.
- Walmart’s unique model utilizes physical stores as shopping locations and distribution hubs.
- Robot pickers enhance efficiency and avoid conflicts between online and in-store customers.
Walmart: Embracing Automation and Playing Offense
“My sense is that the investment community is sitting up in their chair a little bit and looking at Walmart in a different way,” says Chief Financial Officer John David Rainey, referring to the company’s improvements in supply chain automation and increased earnings potential. “There’s a notion that Walmart was late to the e-commerce party or we’re on the defensive. I think we’re playing offense.”
Embracing Automation
In the backroom of one of Walmart’s Bentonville, Ark., automation hubs, picker bots retrieve products in a continuous whirl of motion. There’s still a human element to the work, as employees bag and scan the products the robots deliver to their stations (on our visit, one likened the task to “a form of meditation”). But for better or worse, it’s still a system that allows the largest employer in the world to reduce staff; Walmart has laid off more than 3,000 distribution workers this year.
By fiscal 2026, the company plans to complete some 55% of orders by automated fulfillment centers, reducing the average amount the company spends to process each product by as much as 20%.
The Seamless Walmart Waltz
Employees call the bots’ domain the dance floor for the ceaseless, seamless Walmart waltz the robots carry out. It’s a rhythm the stock can follow higher too. Walmart’s ability to squeeze more profit from every sale makes it easier to argue that the shares, up 11% this year, are still attractive, even with its valuation at 25 times. That’s above its five-year average of 22.3 times, but this is a faster growing, more efficient Walmart. “The stock is not expensive if we begin to give credit for a tech-based omniretail model,” argues Kelly, who thinks the shares should trade to $170.
Walmart’s Positive Outlook
Walmart’s stock has been performing well, and according to San Marco from Neuberger Berman, there is potential for even higher estimates. The current forecasts made by Walmart may not fully reflect the momentum that the company has been generating. This could be interpreted in two ways.
Firstly, it suggests that Walmart’s guidance is overly conservative, indicating the possibility of significant upside. On the other hand, it could also mean that retail, as a whole, is heading towards a challenging period. In that case, owning a major defensive and recession-resistant player like Walmart would be a wise decision.
Regardless of the interpretation, one thing is clear: Walmart stock appears to be a promising investment opportunity.
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