The U.S. economy has been a bastion of relative strength in 2018 versus other developed economies. The second quarter GDP report provided a clear reminder of that understanding and so did the second quarter earnings report from Walmart (WMT).
Walmart is the largest retailer in the U.S., and Costco (COST), which ranks second, isn't even close.
Walmart's U.S. business recorded $318.5 billion in revenue in fiscal 2018, whereas, Costco recorded $126.2 billion in its most recently completed fiscal year, including its foreign operations.
For good measure, Walmart is also the world's largest retailer, having recorded $495.8 billion in net sales in fiscal 2018. For comparison, Amazon.com (AMZN) recorded $177.9 billion in net sales in its latest fiscal year, including the web services business.
Those comparisons make for some good banter, yet they are not the aim of this week's column, which is targeting the big picture takeaways from Walmart's report.
There are several to consider, so we'll get right to them:
1) The 4.5% increase in Walmart U.S. comp sales was the strongest in more than ten years.
That increase is a credit to Walmart's operating strategy, yet it's also a telltale indicator that the U.S. consumer is exhibiting some confident spending behavior.
The latter point was borne out in the acknowledgment that the comp sales growth was supported by grocery, apparel, and seasonal spending, which encompasses both discretionary and non-discretionary items.
2) The Walmart U.S. comp sales increase in the second quarter was driven by an increase in traffic and ticket growth.
Customer traffic increased 2.2% and ticket size increased 2.3%.
The pickup in customer traffic shows that Walmart has a merchandise assortment that is resonating with shoppers and that it is leveraging the success of an omni-channel strategy that enables orders to be placed online and picked up in stores. Furthermore, it demonstrates that Walmart is competing effectively against online competitors, namely Amazon.com.
The increase in ticket shows shoppers are spending more and/or are not resistant to higher overall prices that still remain relatively low at Walmart, which prides itself on being the low-price leader.
3) Walmart's grocery business is a traffic driver and is doing quite well with mid-single-digit comps in the second quarter.
Groceries can be ordered online and picked up in more than 1,800 locations. Additionally, Walmart is expanding its grocery delivery capabilities, saying it is on track to reach about 40% of the U.S. population by year-end with its delivery service.
The success of the grocery business reflects the competitive traction Walmart is gaining with an omni-channel sales strategy that makes it easy for customers to shop in a way that suits them best. Consequently, Walmart is minimizing lost sales opportunities and is taking market share thanks to the investments it has made, and continues to make, in an omni-channel sales approach.
4) Higher wages, better training, and education initiatives have reduced employee turnover and improved retention rates.
Walmart isn't making investments in just its stores and online capabilities, it is also investing in its employees. That investment is paying off in better customer service and increased sales.
Walmart is the nation's largest private employer with more than 2 million employees who are also customers. Importantly, though, satisfied employees (and we're not suggesting every Walmart employee is completely satisfied) help drive a better shopping experience for the many millions more customers shopping online or in Walmart stores.
When Walmart announced a bold plan in October 2015 to invest more in its employees, its stock got clobbered as investors bemoaned the expected hit to the retailer's profit margins and Walmart's acknowledgment that earnings would be negatively impacted in the short term by the investment. Shares of WMT closed that day at $60.03.
Walmart, however, recognized then that it needed to make that investment to ensure it had the right foundation for long-term success. Today, shares of WMT hit a high of $100.12, yet they had traded as high as $109.98 in January.
5) Walmart U.S. eCommerce sales grew 40%, yet the eCommerce business is losing money. In fact, Walmart expects its eCommerce losses this year to be somewhat higher than last year.
It isn't cheap for a retailer the size of Walmart to build out its eCommerce capabilities, yet it is a necessary component for any retailer these days, as there could potentially be an even steeper price to pay for not having an eCommerce business.
Walmart appears to be on the right eCommerce path with 40% sales growth in the second quarter and a projection that eCommerce sales will grow 40% for the full year.
One might be dismayed to hear the eCommerce business is losing money on 40% sales growth; however, it is a trade-off Walmart is willing to make as it recognizes it needs to invest heavily in the short term to ensure it wins in the long term.
Sound familiar? It also sounds encouraging as management is clearly managing the business for the long term.
What It All Means
Walmart's report held a lot of good news for Walmart investors, yet it also contained several big picture messages.
- Consumers are spending confidently.
- Walmart is spending confidently in building out its eCommerce business.
- Retailers need to have an omni-channel sales capability if they are going to try to compete effectively with Amazon.com -- and Walmart for that matter. The former is the 800-pound gorilla online while the latter is the 800-pound gorilla offline aiming to compete with Amazon.com online.
- Satisfied employees create better customer experiences, but that employee satisfaction, if driven by higher compensation, can crimp profit margins if there isn't a commensurate increase in sales or cost cuts elsewhere.
- Walmart's growing eCommerce penetration and delivery capabilities are proof that Amazon.com is not free from competition. The more retailers that figure out a successful omni-channel sales and marketing strategy, the more potential competition there will be for Amazon.com in the retail space.
Walmart scored the benefits of a confident consumer in the second quarter and a resolute corporate growth strategy. A 9.3% gain in its stock price was the proof of point.
The drivers behind its strong comp sales, though, were a case in point that the U.S. economy is relatively strong because the U.S. consumer is relatively strong.
(Editor's Note: The next installment of The Big Picture will be posted the week of August 27.)