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Walmart trims profit forecast as it touts investment push
NEW YORK, Oct 17, 2018 (BSS/AFP) – Walmart trimmed its full-year earnings
forecast on Tuesday following the major acquisition of India’s online
retailer Flipkart and vowed to plow ahead with more investment in the battle
for retail market share with Amazon.
Walmart, which also signaled that sales growth at US stores could slow
modestly next year, said heavy investment was needed to meet customer
expectations in a fast-changing retail environment. Investors appeared to buy
that view, bidding shares higher after early weakness.
“A business that won’t invest won’t last,” Walmart Chief Financial Officer
Brett Biggs said during a presentation for investors. “The payoff from past
investments is paying for new investments.”
Chief Executive Doug McMillon said the company hoped to return to the
robust profit margins of the past but that investment was needed to position
the company for the longer term. He said opportunities could come up
unexpectedly and that he was open to more deals, including in China.
“If something came up in China, even with what’s going on politically, we
would consider it,” he said, alluding to the US-China trade conflict that has
led to tariffs.
Biggs reiterated the company’s concerns about tariffs from ongoing US
trade conflicts with China and others but said it would work to minimize the
effect on consumers.
“Our goal is to always be the low-price leader,” he said, but added later
that “there are certain environments where we would raise prices.”
The world’s biggest retailer cut its profit target for the current year to
a range of $2.65 to $2.80 per share from the prior range of $2.90 to $3.05
following the hit from Flipkart. Walmart also signaled that spending on
Flipkart would likewise dent profit levels next year, its fiscal 2020.
Walmart closed the $16 billion acquisition of a 77 percent stake in
Flipkart in August, its biggest-ever deal.
Walmart executives, who have occasionally taken heat in recent years over
heavy investment on higher store wages, e-commerce and acquisitions have
defended the investments as necessary in the changing retail environment.
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Shares of Walmart, which had initially sunk on the forecast, rose 1.8
percent to $95.50 in early afternoon trading as investors seemed to take the
heavy spending in stride.
“They need to invest because they are looking over their shoulder at
Amazon, which is breathing down their neck,” said CFRA Research analyst Tuna
Amobi.
– Big push in groceries –
Before sealing the deal for Flipkart, Walmart competed directly with
Amazon, which had designs on accelerating its own growth in India. Flipkart
and Amazon have been going head-to-head in a costly battle for domination of
one of the fastest growing online retail markets since 2013.
Walmart’s revenues last year were more than twice that of Amazon, but the
latter has seen massive growth as it has expanded into more business lines
and further afield from its Seattle home and original mission of selling
books online.
But just as Amazon has made more forays into brick-and-mortar retail with
its purchase of Whole Foods Market and the opening of some of its own
physical stores, Walmart has made major e-commerce acquisitions and spent
heavily on mobile applications and other tech-oriented services.
Walmart is also taking more steps in entertainment — another area in
which Amazon is active — unveiling last week a joint venture with Eko, an
interactive video company, to create content such as cooking shows.
At the same time, Walmart executives have tried to boost the in-store
shopping experience, raising wages and investing in store beautification.
The company plans about $11 billion in capital spending next year, about
level with the current year, but will spend very little on new stores,
executives said.
McMillon said higher wages had lessened employee turnover in the United
States and helped lead to a multi-year streak of US comparable store sales
growth.
Walmart projected that comparable sales growth at US stores next year —
fiscal 2020 — would be 2.5 percent to 3.0 percent. Walmart’s US sales are on
track for 3.0 percent growth this year, the company said in August.
Executives described the US consumer environment as solid but noted
several potential worries, including higher gasoline prices, tariff hits and
higher mortgage fees due to the increase in interest rates.
Walmart projected that e-commerce growth next year would be about 35
percent, slower growth than 40 percent expected this year.
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