Credit: Wal-Mart Stores, Inc.WMT has long been a treat for investors, as evident from its splendid bull-run over the past year. Notably, this big box retailer which will soon drop the "hyphen" and "stores" from its name to officially emerge as an omni-channel retailer, has surged 49.5% over a year. With this, the company also crushed the industry 's gain of 40.1%.
Well, Wal-Mart has been riding on its stellar earnings surprise and comparable store sales (comps) record, which in turn has been backed by the company's expansion strategies and constant efforts to counter Amazon's AMZN growing dominance. However, significant investments to boost e-commerce activities have been weighing upon Wal-Mart's gross margin.
So, let's analyze the factors and see if this Zacks Rank #3 (Hold) stock can sustain its robust momentum in 2018.
E-Commerce Strategies to Drive Top Line
Walmart is trying every means to evolve with the changing consumer environment. In this regard, the company has been taking several e-commerce initiatives, including buyouts, alliances, and improved delivery and payment systems. Evidently, Walmart's buyouts of ShoeBuy, Bonobos, Moosejaw, ModCloth and Jet.com underscore its quest to build an impressive digital brand portfolio. The company's 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 third quarter. In fact, Walmart's efforts to enhance its delivery services (like buyout of Parcel and deal with Deliv) resonates quite well with its strategy of growing its online grocery sales. Backed by all aforementioned endeavors, Walmart's U.S. e-commerce sales soared 50% in the third quarter, primarily owing to Walmart.com's performance. Notably, this includes significant contributions from Walmart's online grocery service, which has now expanded to over 1,100 locations and is expected to have 1,000 additions next year.
International Strength: Another Major Driver
Apart from having a dominant store and online presence in the United States, Wal-Mart is also gaining from its solid international operations. With operations spread in China, Mexico, Canada and UK, international forms Wal-Mart's second-largest segment, in terms of revenues. In the third quarter, Walmart's international sales grew 2.5% to $29.1 billion, driven by broad-based growth - with 10 out of 11 markets recording positive comps. Notably, Mexico and China performed exceptionally well, while results in UK also improved in the quarter. Walmart's international sales were mainly fueled by strength in food and staples categories.
Also, the company's constant e-commerce initiatives (like partnership with JD.com) and efforts to enhance logistics efficiencies drove results. Wal-Mart remains committed toward achieving growth across all its markets, on the back of its fresh products; expansion of online grocery and private brands. Backed by these endeavors, the world's largest retailer marked its ninth and 13th consecutive quarter of positive earnings surprise and U.S. comps growth, respectively in the third quarter of fiscal 2018.
Margins Look Strained
While Wal-Mart'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 bps and 29 bps in the second and third quarters of fiscal 2018, respectively. Apart from this, the company has also been spending more on store labor to enhance customer service, which can hinder profit margins.
While these factors and intense competition raise concerns, management's increased earnings guidance for fiscal 2018 and favorable comps view for the fourth quarter reflect its confidence in the company's future prospects. This in turn rekindles optimism about Wal-Mart's strong chances of keeping its spectacular momentum alive.
Looking for More Promising Bets? Check These Trending Retail Stocks
Dollar Tree, Inc. DLTR carrying a Zacks Rank #2 (Buy) has a splendid earnings surprise history and an impressive long-term earnings growth rate of 17.5%. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Ross Stores, Inc. ROST delivered an average positive earnings surprise of 5.5% in the trailing four quarters and has a long-term earnings growth rate of 10%. The company carries the same Zacks Rank as Dollar Tree.
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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.
