Walmart’s Catch-Up Game With Amazon Is Crushing Its Bottom Line

  • With expenses piling up, online strategy draws concerns
  • Transportation, price cuts also weigh on profitability gauge
Walmart Outlook Disappoints as Online Growth Decelerates

Walmart Inc.’s battle with Inc. is hitting its bottom line like never before -- and testing the patience of investors.

The retail giant’s push to expand online operations and cut prices contributed to a record-low operating margin last quarter, according to data compiled by Bloomberg. The profit measure narrowed to 3.3 percent, sparking concerns that Walmart’s long-enviable financial cushion is under pressure.

Transportation and theft also contributed to its shrinking margin, but it’s the e-commerce investments that loom largest for shareholders -- especially as those efforts show signs of diminished returns. Walmart’s online sales grew at less than half the pace last quarter as in the previous three months.

“A long-term question becomes, what kind of operating margin can Walmart ultimately sustain?” Michael Lasser, a UBS Group AG analyst, said in a note.

Walmart compounded the concerns by delivering a disappointing earnings forecast for the coming fiscal year -- and then saying it would no longer offer quarterly profit projections. That sent its shares on their worst tailspin since 2015 on Tuesday. The stock plunged as much as 10 percent to $94.35.

Amazon, meanwhile, is gobbling up customers. The online juggernaut captured about half of online spending growth during the holidays, according to Bain & Co.

Walmart acquired internet upstart in 2016 to try to gain some digital prestige. But now the growth surge from that deal has ended, and the company is left with a conundrum. It’s easier and cheaper to convert Walmart’s brick-and-mortar customers into online shoppers -- rather than going after the kind of consumers who may frequent Amazon. So Chief Executive Officer Doug McMillon is increasingly taking that tack.

But the strategy may leave Walmart in a weaker position in the long run.

Neil Saunders, an analyst at GlobalData Retail, says the company should be spending more to reach Amazon loyalists. Those shoppers simply don’t associate the brick-and-mortar giant with online retail, he said.

Consumers age 25 to 34 do the greatest percentage of their shopping online compared with other generations, according to research from UBS. And city dwellers devote one-third of their spending online, a greater chunk than suburban or rural shoppers, UBS found.

As Walmart figures out its online attack plan, the expenses are piling up. Walmart said on Tuesday that profitability will remain squeezed this fiscal year. But broadening the chain’s appeal may be the biggest challenge.

“Walmart has more work to do to widen its e-commerce customer base,” Saunders said. “There are many demographics, especially younger and professional segments, for whom Walmart is not the destination of choice online.”

— With assistance by Karishma Motwani

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