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Walmart Revenue Buoyed by E-Commerce, but Investments Gouge Profits

With a big push in e-commerce growth through investments and enhancements, Walmart Inc. is expanding its global omnichannel presence, but that doesn’t come without some growing pains.

In a Nutshell: Fresh off taking a majority stake in Indian e-commerce upstart Flipkart—aimed at capturing that burgeoning business and building an overall foundation for its growth in the country and region—Walmart Inc. scored a solid revenue gain in the first quarter, but incurred net income and operating losses.

On the sales side, Walmart said results were driven by comp sales growth in home, automotive and wireless, while unseasonably cool weather in April somewhat negatively impacted traffic and sales in categories like seasonal, lawn & garden, and apparel.

E-commerce sales picked up in the first quarter with 33 percent growth, and the company expects sales to grow roughly 40 percent for the full year. Last week, Walmart launched its redesigned website and app, with a cleaner, more fashion forward look as it works to become the fashion destination it has set out to be. The redesigned site will include a new Lord & Taylor store where customers can shop a broader assortment of premium brands.

Charlie O’Shea, lead retail analyst at Moody’s, said, “E-commerce growth of 33 percent, in tandem with flattish gross and operating margins, continues to reflect Walmart’s significant spending to enhance its online capability, invest in people, price and stores, and battle Amazon for market share. Comparable store sales improvements across the board validate the premise that stores still matter, and Walmart is demonstrating that it is committed to becoming the leader in multi-channel retail.”

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Walmart noted it will pay close to $16 billion for an initial stake of 77 percent in Flipkart. The company’s investment includes $2 billion of new equity funding, expected to help Flipkart accelerate future growth. In operations, Walmart said it was making progress on inventory management, with 12 quarters of reduced comp store inventory, and that it has managed to maintain strong in-stock levels.

Sales: Total revenue in the first quarter ended April 27 increased 4.4% to $122.7 billion from $117.6 billion in the year-ago period. Excluding the effects of currency fluctuations, overall revenue rose 2.7% to $120.7 billion from $117.5 billion.

Walmart U.S. comp sales increased 2.1% and comp traffic increased 0.8%. Sam’s Club comp sales rose 3.8% led by comp traffic growth of 5.6%. Net sales at Walmart International increased 11.7% to $30.3 billion. Excluding currency fluctuations, net sales were up 4.5% to $28.3 billion.

Earnings: Consolidated net income fell 27.8% in the quarter to $2.28 billion form $3.04 billion in the prior-year period. Operating income in the quarter fell 1.6% to $5.2 billion, with Walmart U.S. falling 3.1% to $3.9 billion. The gross margin rate declined 23 basis points, weighted own primarily by “price investments” and higher transportation expense due mostly to higher fuel costs and third party trucking market rate pressures.

Also hurting the bottom line in the quarter was an unrealized loss of $1.8 billion due to a decline in JD.com stock price. Since taking an initial stake in JD.com, the market value of the company’s investment had increased $3.7 billion as of Jan. 31.Walmart noted that in prior periods, it was not required to include unrealized gains or losses within net income. But beginning in fiscal year 2019, due to a change in U.S. accounting principles, Walmart is now required to include unrealized gains/losses of certain equity investments within net income.

CEO’s Take: Doug McMillon: Walmart Inc. president and CEO, said: “Walmart’s first quarter results were solid. We’re encouraged by the progress made across the business and the continued momentum we’ve experienced. Each of our business segments delivered solid sales growth. Walmart U.S. continues to perform well with comp sales growth, excluding fuel, of 2.1%. We…recently introduced new apparel brands with improved design, quality and value. Customer experience scores continue to improve as we’ve lowered prices and taken steps to make shopping with us easier and more enjoyable.”

Adding to that, he said, “Outside of the U.S., eight of 11 markets posted positive comp sales, including our four largest markets of Mexico, U.K., China and Canada…Recently, we took some strategic actions to further position our portfolio for long-term growth. We were pleased with the response of our colleagues in the U.K. following our announcement of the proposed merger of Asda with Sainsbury’s.”