The retailer’s grocery business is booming, and so are its new revenue streams
By guest author Jinjoo Lee from the Wall Street Journal.
For the past five years, Walmart WMT -1.72 % decrease; red down pointing triangle sacrificed margins to grow its e-commerce and new Amazon-like lines of business. This year could be the inflection point where that pays off.
The retail giant on Tuesday reported that Walmart’s U.S. comparable-store sales rose 8.3 % in its quarter ended Jan. 27 compared with a year earlier—healthier than the 4.2 % that analysts polled by Visible Alpha were expecting. Net income for the company overall increased 76 % to USD 6.3 billion, blowing past Wall Street’s estimates of 13 % growth.
Inflation is clearly working in Walmart’s favor. The company said higher-income consumers made up nearly half of the market share gain that Walmart U.S. saw last quarter. Meanwhile, shoppers are opting to pick up private-label brand products, which tend to be cheaper than branded ones but are more profitable for retailers. Private label’s share of overall sales grew 1.6 percentage points last quarter from a year earlier.
Walmart’s U.S. e-commerce sales rose 17 % last quarter from a year earlier. At Amazon, overall online sales declined 2 % over a comparable period. Price-sensitive shoppers’ migration to Walmart’s stores and website has clearly helped the company grow its other Amazon-like lines of business. The retailer said its global advertising business gained nearly 30 % to USD 2.7 billion in its last fiscal year. While that is less than 10 % the size of Amazon’s advertising business, Amazon’s growth was more modest at just 21 % last year. Meanwhile, Walmart+ membership increased to 12 million in the last quarter, up 4 % from the preceding quarter, according to estimates from Consumer Intelligence Research Partners. That compares favorably to Amazon Prime membership, which CIRP estimates has “essentially stopped growing” in the U.S. Amazon doesn’t release growth data on Prime membership, but a spokesman for Amazon said that it “continues to grow” both domestically and worldwide.
Those high-margin businesses are now getting large enough to juice profits. Over the past five years, the company’s operating income rose at about half the rate of sales growth, excluding divestitures. Walmart explained that it had to sacrifice margins to invest in those new revenue streams. This year, though, the company expects operating income growth to slightly outpace sales growth.
Other initiatives should broaden that pool of higher-margin revenue. Walmart in January announced a partnership with Salesforce that would give retailers on Salesforce’s e-commerce platform access to Walmart’s services, including its GoLocal delivery service and an app that helps retailers improve picking accuracy and speed. The company also launched a new e-commerce site for businesses last month, creating a competitor to Amazon Business.
Walmart’s stock edged up 0.5 % around midday Tuesday following its earnings call, while Amazon’s shares dropped 2.8 %. Its online and advertising business is still small, but it might be large enough to rattle Amazon’s once-supreme confidence.