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Wall Street Journal February 20, 2018

Walmart Stumbles in Shift to Web Selling

Holidays sales were strong, but growth shrinks online as inventory misjudgment hit e-commerce warehouses

By

Sarah Nassauer

Updated Feb. 20, 2018

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Walmart

Inc., which had improved its e-commerce operations over the past year in its fierce battle with Amazon.com Inc., stumbled in the fourth quarter after misjudging its online inventory for the holiday season, sending its stock tumbling and slicing more than $31 billion from its market capitalization.

Walmart shares fell more than 10% Tuesday, with the downdraft pulling many retail stocks along. It was the biggest one-day drop in stock price since 1988 for the world’s largest retailer.

Walmart Chief Executive Doug McMillon said that as holiday goods like TVs and toys flooded Walmart’s e-commerce warehouses, they squeezed the room for everyday items such as toilet paper. That meant the retailer ran out of some items, hurting online sales. “Our in-stock for basic items suffered as a result,” Mr. McMillon said.

Walmart also said its U.S. profit margins were hit by lower prices and by more sales shifting to the web. Online sales are generally less profitable than those in stores.

The retailer’s shares had skyrocketed this year, boosted by high expectations for its online growth. On Tuesday, Walmart reported a 2.6% gain in overall sales for the quarter ended Jan. 31, for its 14th consecutive quarter of growth. But its U.S. online sales grew only 23% in the quarter, in contrast with three previous quarters of more than 50% growth.

That wasn’t enough for investors. “This quarter did not live up to those high expectations,” said Simeon Gutman, a retail analyst for Morgan Stanley.

Still, Mr. McMillon on Tuesday expressed confidence. “Looking ahead, we expect e-commerce growth to increase from the fourth-quarter level as we enter the new year,” he told analysts.

E-commerce accounts for less than 4% of Walmart’s over-$500 billion in annual revenue. Walmart expects online sales to grow 40% for the current fiscal year, which ends next Jan. 31.

Walmart has been working quickly to build its e-commerce business in recent years and head off Amazon.com’s dominance online. It has shifted spending to invest in its web operations, including faster home delivery and e-commerce acquisitions. It also has spent to improve existing stores, while it cut jobs and tightened expense controls.

The company closed 10% of U.S. Sam’s Club locations earlier this year and has slowed Walmart store openings to focus on e-commerce growth.

The retail industry more broadly is struggling to meet the e-commerce challenge. On Tuesday, grocer Albertsons Cos. said it

plans to buy the rest of Rite Aid

Corp. that isn’t already being sold to

Walgreens Boots Alliance

Inc. The chief executives of the companies said in interviews Monday the merger is the best way for them to compete against the increasing threaten from Amazon and an emboldened Walmart.

Target

Corp. bought same-day delivery service Shipt in December.

Walmart’s acquisition of online store Jet in September 2016 was a big part of the retailer’s e-commerce strategy, and new features like free two-day shipping on more items and an expanded online selection helped boost online sales quickly.

Walmart has added hundreds of online grocery pickup locations at stores, which are counted in the e-commerce sales figures.

On Tuesday, Walmart signaled a shift in its online strategy, saying it would put more focus on acquiring new customers for its main Walmart website, which has national brand recognition, and would slow marketing spending for Jet, which caters to higher-income, urban shoppers.

That will lead to slowing sales for Jet temporarily, Mr. McMillon said.

“E-commerce growth, it ebbs and flows,” at all retailers, said Brendan Witcher, principal analyst at Forrester Research. The latest quarter indicated e-commerce growth at Walmart remained healthy, he added.

Walmart said Tuesday earnings per share would come in between $4.75 and $5.00 for the fiscal year, lower than some had been anticipating, mainly due to a smaller-than-expected benefit from recent tax-code changes. The company said the new U.S. tax law added $207 million to earnings in its latest quarter, but that amount could shift in future quarters as the company completes its analysis.

Walmart’s overall holiday sales rose on a strong economy. Improvements to its food and household-goods areas also boosted sales, the retailer said.

Holiday sales, buoyed by rising wages and low unemployment, were strong at many traditional retailers and at Amazon.com. Last month Target,

Macy’s

Inc. and

J.C. Penney

Co. said holiday sales rose.

On an adjusted basis, Walmart reported a profit of $1.33 a share for its fourth quarter, below the $1.37 expected by analysts polled by Thomson Reuters.

Walmart said the closings of 63 Sam’s Clubs during the quarter and discontinuing real-estate projects and activities related to the new tax code reduced per-share earnings by 60 cents.

Article #2 Questions

1. What steps, as outlined in the article, does senior management seem to be taking to change the organization to enable it to effectively deal with E-commerce?

2. After Walmart announced its 4th quarter earnings, the price of its stock dropped by 10%. Does this seem to make sense to you or do you think it was an over-reaction by investors? Give your reasons.

3. Do you shop at a Walmart store or on their website? Why or why not?

4. What do YOU think Walmart needs to do to compete with Amazon?

5. Compare the sales and net income of the company for the past three years. You may show net income as earnings per share (EPS). Is there any trend that you see?