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Walmart Sets Out Clear Plans to Grow Online Profits

Walmart Inc. is using technology and acquisitions to provide a better value proposition for consumers, with a key focus on growing the repeat online customer to improve its digital profitability.

The company on Tuesday posted fourth-quarter results that bested Wall Street’s estimates, helped in part by comparable-store sales growth in the U.S. and a 43 percent jump in e-commerce sales.

However, losses connected with digital are expected to continue and even increase in fiscal 2020 as the company continues investing in infrastructure, people, grocery and its Store No. 8 incubation arm. That has created a greater focus on how to improve digital profitability, mostly with higher-margin categories like apparel.

Douglas McMillon, president and chief executive officer, said in a conference call to Wall Street analysts, “We see the future as a frictionless experience across stores and e-commerce, but we have more work to do as customers raise their expectations, competition persists and the omni-retail story continues to evolve.” McMillon also told analysts the company needs to “make more progress to improve profitability.”

Previous investments in fulfillment centers and systems, plus its acquisitions, are helping drive strong sales for Walmart. Enhancing the assortment mix should help improve fulfillment and shipping costs connected to online sales, which in turn would encourage repeat visits and contribute to improve profitability, McMillon said.

But the CEO was also candid about being surprised at how long it was taking to build an apparel and general merchandise assortment that would create a “repeatable healthy mix of business online.” Walmart is banking on the ability to get repeat customers so it can generate “positive contribution margin” for the online basket.

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“So we’re pedaling fast, trying to make that happen and disappointed that it’s taken as long as it [has],” McMillon said.

Looking ahead

During the year, Walmart added more brands and exclusive items through partnerships that include Lord & Taylor, Ellen DeGeneres, Sofia Vergara and Fanatics.

The company is also looking at acquisitions to expand the merchandise mix. Over the last few years Walmart has acquired digitally native brands, including Bonobos, and Bare Necessities to its portfolio.

“We’re after assortment, we’re after a repetitive customer relationship and we’re looking constantly at various acquisitions,” McMillon said. While the company will continue to evaluate opportunities, McMillon said it wasn’t possible to give a number or otherwise quantify what how many deals, if any, might get done in 2019.

Past investments in technology and infrastructure have also played a role in helping the mass discounter improve its omni capabilities.

According to Brett M. Biggs, executive vice president and chief financial officer, “Clearly, we’re operating in a healthy consumer environment, but our integrated omni-offering provided by the convenience customers were looking for during the holiday season.”

The CFO said the company has made progress in its U.S. e-commerce business, adding, “We’re still working to optimize our margin mix so that we can achieve the long-term profit profile we want. The team is working with a great sense of urgency to increase sales in key areas like home and apparel, which will help margin rates while simultaneously investing in new innovative solutions.”

On to the last mile

Omnichannel capabilities are also progressing across the company’s international platforms. The company has accelerated its omni growth in Canada, Mexico, Chile and Japan through partnerships and acquisitions. It is furthest along in China because of its partnership with, its relationship with Tencent and the investments made in last-mile delivery.

“We’re using a combination of last mile solutions. We’re using crowd-sourced companies, and we have our own platforms [such as] Spark that we’re experimenting with, and we’re still playing around with some associate deliveries in a small way to figure that out,” McMillon said. “But it’s the crowd-sourced delivery platforms  that are really helping us achieve scale.”

Supercenters that can also function as fulfillment centers will be a help with maintaining in-stocks for deliveries, McMillon said, and all the better if those same stores are also capable of generating a great store experience.

Consumer trumps all

Looking ahead, neither Biggs nor McMillon sees any hiccups that would impact the consumer—or at least not in the U.S.

According to Biggs on the consumer front: “It still feels pretty good to us…Wages are still pretty good, unemployment rates low [and] gas prices are down year-on-year. So there’s a number of things that, I think, are still working in favor of the consumer.”

Even inflation didn’t seem to be an issue. Biggs said, “We’re not seeing a great deal of inflation. I would call it fairly modest at this point. When you look at what we’re doing from a price perspective, I think our customers really aren’t seeing much inflation because of what we’re doing.”

Even where Walmart might be seeing some pressures with vendor price increases, McMillon said, “I think I would just say that the combination of cost pressures that we’re feeling, with the price reductions that we’re making, has worked out in a way that the customers are not feeling very much impacted.”

The CEO summed up the company’s strategy as one that’s aligned with its core shopper: “Our commitment to the customer is clear. We’ll be there when, where and how they want to shop. Our distinctive set of assets, financial strength and innovative culture are delivering the customers new experiences that are uniquely Walmart.”

He also made a point of emphasizing to analysts that Walmart will continue to evolve and innovate.

“We fully expect the pace of change to accelerate in the next five years, versus the last five years as emerging technologies come together to transform retail even further, and we’re adapting. What we once could only imagine a decade ago will increasingly become reality. We will embrace new technologies to solve problems for customers in a seamless way and equip associates with tools to make them more productive. Within our ecosystem, we will pursue and grow adjacent businesses to increase customer engagement and will leverage core capabilities to deliver services to others that could generate new revenue streams,” McMillon said.

While he didn’t quite elaborate on what those new revenue streams might be, the CEO did hint at opportunities in the health and wellness sector, as well as in financial services.

Analysts’ perspective

Wall Street analysts seemed impressed by the retailer’s initiatives.

Joseph Feldman, retail analyst at Telsey Advisory Group, said, “We continue to believe Walmart is among the few retailers that will prove successful in operating a truly omnichannel model, given its strong management team, focus on the customer, ability to leverage talent and technology, and solid financial flexibility.” He noted the retailer’s dominance in the brick-and-mortar channel and “new prowess in digital commerce for the past couple of years.”

Charlie O’Shea, retail credit analyst at Moody’s Investors Service, said, “Walmart’s blowout [fourth quarter] continues to validate its strategic investments, with online sales growth leading what was very strong performance on all fronts.

O’Shea noted that food continues to be a critical category for the discounter, with the company planning on upping its investments in the sector. “We expect 2019 to be another year where investments produce significantly favorable results, with Walmart to continue to flex its muscle across multiple product categories,” he said.

And Cowen & Co.’s Oliver Chen cited strategies to grow digital and curbside pickup will drive a “sustainable competitive advantage as adoption accelerates.” While Chen said fiscal 2020 guidance of a 35 percent gain in digital growth is impressive–he said it will come from organic efforts, new partnerships and mergers and acquisitions–that analyst said that “margins remain a factor to watch.”