Online sales hiccup dogs Walmart

Slower growth sapped stock

Posted: February 27, 2018 at 4:30 a.m.

Walmart Inc. hit a speed bump last year in building an e-commerce business capable of keeping pace with online giant

The Bentonville company reported slower U.S. online sales growth during the Christmas shopping season and was punished by investors. The stock price tumbled 10 percent during trading Feb. 20, then fell another 3 percent the next day before the slide ended.

The hiccup halted momentum Walmart had built over the past 18 months after acquiring and placing its founder, Marc Lore, in charge of the company's U.S. e-commerce business. The struggles led to a news report last week that Lore was considering his departure from the company. He told CNBC on Friday he was "absolutely not" leaving.

Walmart's online business, which produced about $11.5 billion in sales for the fiscal year, represents roughly 4 percent of the company's U.S. net sales. But its digital performance is being watched closely by retail analysts as more shopping shifts to the Web and Amazon's influence continues to grow.

The retailer was questioned about its e-commerce projections during a conference call with analysts last week, and Chief Executive Officer Doug McMillon stood by the company's plans to grow domestic online sales by 40 percent during the fiscal year.

Keith Anderson, senior vice president of strategy and insights of Boston-based e-commerce analytics firm Profitero said the goal of 40 percent growth was "very aggressive" when Walmart first set it in October. It seems more aggressive now.

"They do have some ways to juice the performance that would make me say it's possible, but it's aggressive," Anderson said.

The retailer had largely been applauded by analysts for its efforts to close the gap with Amazon last year with sales growth reaching 50 percent or higher in each of the previous quarters. The increases were boosted by an expansion of offerings through acquisitions like, Bonobos and ModCloth. But the online sales increase growth cooled to 23 percent in the fourth quarter.

"Strategically you spent the last year making a very credible case that you might be the one company that would be able to go toe-to-toe with Amazon," said Neil Stern, a senior partner at Chicago-based retailer consulting firm McMillan Doolittle. "In order to do that, you've got to be able to show real growth and 23 percent doesn't cut it."

Walmart told investors that most of the slowdown was expected after, which was acquired in September 2016, contributed less to the sales growth after being "lapped."

The retailer also said the volume of orders for holiday items resulted in inventory issues, and that played a small role in the unexpected slump.

McMillon described it as a learning experience for the company, and it didn't change Walmart's plan to boost online sales.

One initiative is the launch of two stand-alone online brands to attract upscale shoppers, according to the Washington Post. The newspaper cited anonymous sources as saying Walmart is preparing to unveil a luxury mattress and bedding brand named Allswell next month. The other brand, Co Squared, will focus on cosmetics.

Walmart is doubling its online grocery pickup locations during the current fiscal year. The retailer said the service will be available in about 2,000 stores. Grocery delivery tests are expanding as well.

"Online grocery is ramping up," McMillon said.

A website redesign will debut this spring with a focus on fashion and home goods, including a dedicated page to sell items from department store Lord & Taylor. The company announced plans last week to improve its home goods space to include curated collections and style choices to make browsing easier.

The new website also will include's smart cart technology, which offers discounts to customers if they buy more products. Walmart hopes to coax shoppers into building bigger baskets to improve profitability.

"They still have a number of levers to pull," said Ben Bienvenu, a retail analyst with Stephens Inc. "But facing the gross comparisons that the company has ahead of it in the first half of this year, they're going to have to ramp up to that 40 percent. The back half of their fiscal year should deliver growth in excess of 40 percent."

Even if Walmart reaches the mark, Edward Jones analyst Brian Yarbrough said mounting costs are a concern as continues to dominate e-commerce and other retailers improve their capabilities.

Walmart has poured billions of dollars into its efforts to build out its online business and develop strategies to link the company's e-commerce initiatives with its in-store offerings in hopes of driving sales and profits.

The company said in October that future e-commerce losses would not reach the same level as the previous year as Walmart scaled the business. But McMillon said during last week's call it was possible the retailer could lose even more money in its e-commerce business this year.

"You don't know if they're ever going to make money at this," Yarbrough said. "I keep hearing them talk about scale, scale, scale. I think it's going to remain very difficult and I think they're coming to slowly realize that."

The stock slide didn't surprise Yarbrough and other analysts, who said Walmart's rapid climb over the past year was fueled by an influx of investors largely keying in on the retailer's e-commerce growth.

Walmart shares climbed more than 40 percent in 2017 and traded as high as $109.98 earlier this year. So when Walmart's e-commerce sales were less-than-impressive in the quarter and profits continued to lag, it led to the tumble even as the company reported strong same-store sales and traffic figures.

Walmart shares rose 23 cents to close Monday at $93.12.

"When you have a stock that has its valuation go up as dramatically as it did over the course of the last six months on really robust e-commerce growth, when that slows, just because of where we are and how abstract the company is being valued, you're going to lose a lot of momentum," Bienvenu said.

Stern of McMillan Doolittle said it's clear the slowing online sales pace and shrinking profits were a "wake-up call" after Walmart wrapped up 2017 with so much momentum.

Regaining it will be Walmart's challenge as the company pushes further into 2018.

"If second quarter comes around and things are looking better, then we won't worry about it," Stern said. "But if it's a tough second quarter, tough third quarter, then you start wondering if 2017 was the aberration and this is the future. That would be worrisome."

A Section on 02/27/2018