E-Commerce Continues to Drive Walmart, Soft Margins a Worry

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Walmart Inc.WMT , which has taken aggressive e-commerce strategies to counter the growing dominance of Amazon AMZN , has gained close to 23% in a year's time compared with the industry 's growth of almost 26%. In fact, there have been rounds in this regard that Moosejaw, which was acquired by Walmart last year, will feature on Walmart's website. The move comes as part of Walmart's constant efforts to strengthen its digital marketplace and boost online traffic.

E-Commerce Game On

Well, Walmart has long been undertaking efforts including buyouts, alliances, and improved delivery and payment systems to enhance its online operations in order to stay firm in its race with Amazon. To this end, the company recently revealed intentions to establish a five-year strategic partnership with Microsoft MSFT . The deal is likely to strengthen Walmart's digital capabilities through Microsoft's strength in providing advanced cloud solutions. Also, Walmart clinched contracts to buy a 77% stake in India's leading e-commerce name, Flipkart, which is likely to conclude soon. Though the deal is expected to hurt the bottom line in the short run, it is likely to bolster Walmart's e-commerce sales in the long run.

Apart from this, Walmart's buyouts of ShoeBuy, Bonobos, ModCloth and Jet.com, and deals with Rakuten, and Lord and Taylor underscore its quest to build an impressive digital brand portfolio. The company's latest plans to venture into the subscription-based video streaming arena and Walmart2World money transfer service along with Walmart Pay mobile payment system and Mobile Express Returns program further highlight its focus on accelerating online business, and making shopping easier and faster. Apart from this, Walmart is making aggressive efforts to expand in the booming online grocery space, which was a major contributor to its e-commerce sales in the second quarter of fiscal 2019.

Online Grocery a Major Driver

Given the rising demand for online grocery, this world's largest retailer remains committed to enrich consumers' experiences by providing easy shopping methods and seamless grocery deliveries. To this end, Walmart recently raised its stake in Dada-JD Daojia to 10%, in a move to strengthen its last-mile delivery service and further enhance omni-channel offering. In an earlier development, Walmart inked a deal with Postmates to extend its online grocery delivery service to cover more than 40% of the families in the United States.

Other than this, the company's contract with DoorDash and acquisition of last-mile delivery service Parcel highlights its focus on enhancing grocery sales. Further, the company's Walmart Pickup program enables customers to place orders online and then pick them up at a store for free. In earlier developments, Walmart also tested same-day delivery with Deliv. We believe that these actions help the company offer multiple choices to online grocery shoppers amid increasing competition from Amazon. Apart from Walmart, retail behemoths like Kroger KR and Target TGT are also trying all means to expand their online grocery operations.

Coming back to Walmart, such aforementioned endeavors helped its U.S. e-commerce sales soar 40% in the second quarter of fiscal 2019, much better than a 33% rise reported in the first quarter. E-commerce sales improved on the back of enhanced online assortment with 1,100 new renowned brands and increased grocery pickups. These factors keep management encouraged about achieving 40% U.S. e-commerce sales growth in fiscal 2019.

E-commerce Growth Comes at the Cost of Margins

While Walmart's online strategies have been driving its business, costs associated with investments in e-commerce expansion and technological advancements; the mix impact from growing e-commerce operations and Walmart's compelling pricing strategy have been weighing on its margins. Evidently, these factors caused the company's gross margin to contract 11 basis points (bps), 29 bps and 61 bps in the second, third and fourth quarters of fiscal 2018, respectively. In first-quarter fiscal 2019, gross margin shrank 15 bps. It contracted 17 bps in the second quarter due to price investments in various markets and increased transportation costs.

Management earlier projected margins to remain pressurized in fiscal 2019. Nevertheless, this Zacks Rank #3 (Hold) company's superb e-commerce strategies along with its other sales driving efforts should help it combat these hurdles.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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