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Walmart's E-Commerce Push Continues

Online sales are boosting growth but hurting profitability for now.

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 Walmart’s (WMT) first-quarter results showcased the company’s progress in expanding beyond its core brick-and-mortar footprint, with e-commerce sales (5% of total sales) rising 33% on top of a 63% increase last year. This contributed 100 basis points to U.S. comparable-store growth of 2.1%, generally aligning with our 35% e-commerce and 2.3% comp sales growth estimates for the full year. We believe this growth is more impressive in the face of pressure from Amazon (AMZN) and other mass merchants vying for traffic. The sales momentum came at a cost, as we believe the 30-basis-point erosion in operating margin to 4.2% was attributable to the variable costs associated with shipping online orders and planned wage increases. However, we had anticipated that cost pressures would persist and forecast a 4.3% operating margin for the full year. We view the shares as modestly undervalued and suggest investors keep this wide-moat name on their radar.

Walmart’s growth opportunities aren’t confined to expanding distribution. Our 2.5% average 10-year top-line growth estimate assumes continued gains in the grocery segment (60% of total sales). This quarter’s results supported our thesis, with the category comping at a low-single-digit rate, similar to the prior four quarters. We expect this trajectory to persist, given Walmart’s 1,100 click-and-collect stores currently and 2,100 expected by year-end, versus its 4,700 total U.S. stores. These outlets are useful for traditional retailing but also could bolster e-commerce sales as they are used for pickup and fulfillment. We think these omnichannel efforts are aided by the 200 automated pickup towers in stores, which also validate Walmart’s existing physical units. As a result of its scale and reach, we think Walmart is poised for growth and should sustain its competitive edge against industry headwinds.

John Brick, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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