Walmart Resets the Bar

At its annual investor day today in New York, Walmart CEO Doug McMillon, CFO Charles Holley, President and CEO of Walmart US Greg Foran and President and CEO of Global eCommerce Neil Ashe all presented. The presentation focused on Walmart stores in the US and the company’s e-commerce channel. The company reset the bar in terms of its guidance for the next few years. Management now expects sales to be relatively flat this fiscal year (2016) versus prior expectations of 1%–2% growth due to a stronger impact from currency exchange rates, which will pressure comps by 300 basis points. Over the next few years, sales growth is expected to be 3%–4%. Walmart is making up for years of under investment as it prioritized productivity and expense leverage. The current management team is setting the stage for the company long term. Walmart is investing in improving the store experience and expanding its online capabilities, and it is merging the two to provide a seamless experience for customers. New initiatives include in-store pickup of online/mobile orders and grocery delivery in select markets. The bulk of the investment spending will come in fiscal year 2017. Incremental capex will total $1.5 billion, most of which will be related to wage increases and employee training in addition to investments in e-commerce. That is expected to result in a 6%–12% decline in EPS in the company’s next fiscal year.

Seeing Momentum in the US Business

The US economy was characterized as “okay,” “steady” and “generally in pretty good shape.” The company has seen a shift in category trends to more discretionary items, including apparel and general merchandise, indicating improved consumer sentiment. The decline in gas prices has also helped drive higher spending. Management described the back-to-school season as “pretty good,” noted that Halloween is off to a good start and said that it expects the holidays to be highly promotional but “fine.”

Competition Continues to Intensify as Management Works to Strengthen Offering

A key focus of the presentation—and a topic that elicited numerous questions—was existing and incoming competition in the discount space, including Aldi in grocery and Primark in apparel in addition to Amazon and Jet.com. In the near term, the company’s focus is on resetting wages and investing in employees and the overall in-store experience. Over time, however, it plans to shift to investing in price in order to reestablish its position and widen its margin as the low-price leader for its customers. That will be done through a markdown initiative, improved buying and partnering with the best merchants. With regard to improving the store experience in the US, the focus us on a “fast, clean and friendly” initiative. Previously, only 16% of stores could claim a “passing” level on these fronts: today, that number is closer to 67%. That bar will continue to move higher as the company works to get stores to where they need to be. The plan is to do so one step at a time, and management noted the process will evolve rather than changing stores overnight. Positive feedback from customers has come through improved comp performance in stores with improved scores; management has seen a high correlation between stores with high scores and better comp performance. Within stores, fresh foods are an area of focus, specifically produce and fresh meat, as those are categories in which both price and quality, not just price, are important to shoppers—as such, they are categories where Walmart can gain consumers’ trust.

E-Commerce Growth Continues to Outpace Store Growth

E-commerce remains a small part of the overall business, but its growth has outpaced that of stores. In an effort to provide customers with a seamless shopping experience, Walmart is continuing to invest in the segment and is building out its offerings. Examples include in-store pickup capability for online/mobile orders and grocery delivery, which will be available in 20 markets by the end of the year and will continue to expand. Management noted that consumers who shop in stores typically spend $1,400 per year, while online-only shoppers spend about $200 per year. Consumers who shop both channels spend an average of $2,500 per year. The company plans to leverage its existing infrastructure, numerous distribution centers and stores, and supplier relationships to best serve customers. The grocery business is an example of a category where the company can leverage its physical store base to enable in-store pickup and local delivery. Online grocery, which is currently offered only in limited markets, can give Walmart access to new customers. Since launching the service in Denver six months ago, the company has found that one in four customers who bought groceries online was a new customer to Walmart. In Northern Arkansas, where the company is based, the number was one in six.