Pressure mounts for Wal-Mart to deliver online as retail sales stale
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The world's largest retailer is feeling the hot as the market takes its demands up a notch and expects the retail giant to show how its decision to shift its capital expenditures toward digital and store remodels is paying off for investors.
At its annual investor day in Arkansas, Wal-Mart said on Thursday it would open fewer stores in the US this year than originally expected. By year's end, the company will have launched 130 new domestic stores, down from the 135 to 155 it originally projected.
At Walmart’s annual investor day this year, the company announced something of a change of pace from the last several decades of its growth and development.
Next year the growth slowdown will be even more noticeable, as Wal-Mart said it will open just 55 stores in the US. As unveiled by the group at its last meeting, of the company's 11 billion dollars in capital expenditures next year, just 20 percent will be invested into opening new stores, compared against the 50 percent of Wal-Mart's 13.1 billion dollars budget four years earlier.
Wal-Mart’s future is digital, more than ever, say analysts
"This is a different Wal-Mart," Moody's analyst Charlie O'Shea said. Agreeing on how the retailer needs to adapt to different times, Cowen and Company analyst Oliver Chen stresses that "There's so many physical customers that come to a Wal-Mart," noting that 90 percent of the US population lives within 15 minutes of a store.
Chen adds that the timing is right for Wal-Mart to make this shift, to capitalize on the company’s momentum. The group has ramped up its efforts across the US, aligning itself with its sales target growth of growth of 3 percent to 4 percent annually, excluding the impact of currency. Wal-Mart is well on track to achieve its objective this year.
Wal-Mart's digital sales growth accelerated in the fiscal second quarter, rising 11.8 percent, making this the first quarter that metric had picked up in more than a year. This was the quarter when Wal-Mart closed its Jet deal.
Analysts view Jet as a critical piece of Wal-Mart's digital future. Wal-Mart has set its sights on 20 percent to 30 percent online sales growth in the second half and beyond, which O'Shea and Chen called achievable.
"You just spent 3.3 billion dollars accruing this asset. You've got to maximise it ... and that's what they're doing," O'Shea said in this regard.
Wal-Mart on Thursday maintained its forecast for adjusted earnings per share of 4.15 to 4.35 dollars this year. But its shares fell 3 percent as it walked back its estimates for fiscal 2018 and 2019.
Wal-Mart predicts fiscal 2018 earnings will be relatively flat with this year's adjusted figure. And in fiscal 2019, it expects earnings per share growth of 5 percent. Wal-Mart previously said it expected earnings per share in fiscal 2018 to increase modestly and then grow 5 to 10 percent in fiscal 2019.
"It's good that they've set a reasonable bar, and I think there's some upside potential," agreed Chen on the company’s decision.
Both Chen and O'Shea agreed that while Wal-Mart's investments are expensive, they're necessary for the future of the world’s largest retailer by sales.
Similarly, Credit Suisse analyst Edward Kelly and team note that “The message overall was strong – less focus on new brick and mortar stores, more focus on driving comps, and accelerate digital growth. Jet.com is clearly viewed as an accelerator for the company’s transformation.”
Kelly highlights as well that “Unfortunately, moving faster comes at a cost and is now likely to lead to at least another year of declining operating earnings. Losing more money in e-commerce is still not fashionable for a traditional retailer, and the stock reacted accordingly.” However, the analyst remains positive about the company, advancing that he and his team “were not negatively swayed by the update and maintain our ‘Outperform’ in a tough group.”
“The company has challenges, but U.S. momentum should remain relatively good, digital sales are poised to accelerate, and earnings risk seems low for the upcoming year,” sums up Kelly in a note to market.