This is an excerpt from Monday’s (2/22) Point of Sale retail supply chain newsletter sponsored by ArcBest.
Walmart (NYSE: WMT) reported Q4 earnings last week that fell short of Wall Street’s expectations, despite posting same-store sales growth of 8.6%. That’s a huge handle for a company Walmart’s size and is by far the highest growth among comparable stores in the past 10 years, more than double the next closest growth rate of 3.7% in 2019.
But Walmart’s stock sold off hard after earnings were posted because Walmart’s costs came in well above expectations (it tallied $1.1 billion in COVID-related expenses in Q4 alone) and the company guided for sales to moderate this year. Here are the highlights:
Walmart and other general retailers benefited greatly from pandemic spending trends. I don’t need to spend much time explaining that Walmart began the year with Americans hoarding household essentials — y’all remember the toilet paper tussles. Nor do I need to explain why Walmart maintained extremely strong same-store sales growth throughout the year — y’all weren’t eating out either.
Furthermore, Walmart was there to fulfill many of the at-home spending habits that developed while we were stuck at home. Need a desk, TV, computer screen, air fryer, bicycle or whatever else can keep you entertained? Walmart’s got that too.
And investments Walmart made over the past decade to boost its online business, like curbside pickup and speedy delivery, meant customers could purchase just about anything contactlessly, should they desire. In 2020, online sales shared the continued momentum in general merchandise, while grocery pickup and delivery benefited from Walmart’s scale and continued strong execution across contactless fulfillment options.
But growth is decelerating markedly, which should come as no surprise. A company the size of Walmart (or Target or Home Depot), can’t grow online sales at triple digits forever. The decelerating pace of the e-commerce growth rate points to some challenges it will face as tailwinds from the global health crisis trends fade.
Without a doubt, American spending will revert back toward a historically normal level of services when vaccinations are widespread and the economy reopens fully. We’ve seen evidence of this in countries with better control over the virus, like China. In the opening weekend of Lunar New Year, China destroyed the previous opening weekend box office record. Despite theaters operating at 50% or 75% capacity, IMAX hauled in 45% sales growth this year over the record-breaking 2019 opening weekend. People are anxious to do all the things COVID has prevented them from doing, and all of those things happen outside of Walmart’s doors.
So what is Walmart doing? Investing. Heavily. In supply chain and logistics.
After adding $40 billion to the top line in 2020, Walmart feels it is at least a year ahead of schedule. CFO Brett Briggs believes the company needs to “lean in more aggressively in key markets with increased capital and fulfillment capacity, supply chain, automation and technology.”
Walmart is under pressure to turn thriving parts of its business into moneymakers. Walmart’s e-commerce has had dramatic gains, but it has not yet turned a profit. Online services that have gained popularity, such as curbside pickup, require additional labor as employees pick and pack orders. That translates to higher labor costs that Walmart has not been passing on to its customers, even as more take advantage of the convenience of shopping online.
“Change in retail accelerated in 2020. The capabilities we’ve built in previous years put us ahead, and we’re going to stay ahead. Our business is strong, and we’re making it even stronger with targeted investments to accelerate growth. This is a time to be even more aggressive because of the opportunity we see in front of us,” said CEO Doug McMillon at Walmart’s virtual investor community meeting. “The strategy, team and capabilities are in place. We have momentum with customers and our financial position is strong.”
Walmart is stepping up its capital expenditures this year as it sows the seeds for future online profitability. Briggs pointed to new infrastructure, including fulfillment capacity, supply chain, automation and technology, that will allow WMT to expand e-commerce assortment, optimize inventory levels and product placement, enabling the company to reduce both shipping time and cost.
Walmart has embarked on dozens of next-gen technology pilots, including drones and autonomous delivery, all aimed at increasing the speed and dropping the costs of e-commerce fulfillment. But its biggest experiment has been its local fulfillment center (LFC) model debuted in Salem, New Hampshire, in 2019. Walmart announced in January it plans to scale its LFC model, powered by an impressive robotics system called Alphabot, to “dozens of locations, with many more to come.” (I detailed WMT’s fulfillment strategy versus Kroger’s last month. Read here.)
We don’t have hard cost estimates on Walmart’s LFC buildouts, but we can be certain much of the “fulfillment capacity, supply chain, automation and technology” investment Briggs referred to revolves around Alphabot and LFC expansion.
All told, Walmart is targeting about $14 billion in capital expenditures this fiscal year, up from a rate of $10 billion to $11 billion, as it invests in supply chain, automation and improvements to the customer experience.
Recently there has been a marked shift in Walmart’s strategy. The company now not only wants to sell groceries, clothes and pretty much everything else, it wants to leverage its greatest asset — its reach — to chase new business opportunities, including bulking up its ad business, becoming a major health care provider and continuing to build out its financial services on the back of the recent Ribbit Capital partnership.
With this strategy, Walmart is acknowledging a tough reality: retail may not be enough to power its future.
But that doesn’t mean Walmart isn’t expecting top- and bottom-line growth for the foreseeable future. Nor does it mean Walmart has lost focus of its breadwinning business. Quite the opposite. Walmart knows it gained market share in 2020, in part by subsidizing online sales growth by not passing additional costs to consumers. Now the company is focused on tweaking and iterating upon services Americans fell in love with in 2020, while continuing to improve the in-store experience.
The beauty is that Alphabot and LFCs do both. Alphabot can pick and pack orders 10x as fast as humans can, and it removes the vast majority of pickers from the floor, leading to less congested aisles and fewer depleted shelves. Walmart will continue to push the envelope with pilots, partnerships and acquisitions of technologies as it experiments with different fulfillment methods, freight networks and delivery strategies. But LFCs are no longer an experiment and its first act was highly successful. It’s time for the main stage.
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