FINANCE

Analysis: U.S. operation is the ‘star of the show’ at Walmart

Walmart has kicked off its new fiscal year with a strong set of numbers that demonstrate it is maintaining its pace of growth even as it laps tougher comparatives and as the consumer economy tightens.

The U.S. operation remains the star of the show, posting a 3.4% uplift in comparable sales. This is an exceptionally good result for a first quarter and is partly driven by higher customer numbers in stores and online. We believe that some of this is down to the fact shoppers are now becoming more price sensitive, which plays into one of Walmart’s core strengths.

However, the impact of online cannot be overlooked. The U.S. e-commerce operation expanded by 37% during the quarter, which makes Walmart one of the best growing mature retailers in the online market. This uplift has come from both new customers attracted by Walmart’s improved shipping speeds and existing shoppers buying more as Walmart expands its services and online offer. Pleasingly, many of these new customer acquisitions are coming from non-traditional Walmart segments including younger and more affluent shoppers. In our view, Walmart is now a major competitive force in e-commerce and is capable of capturing shopper share from Amazon and others.

Looking ahead, we think Walmart is fully committed to building a competitive edge with e-commerce, especially via delivery and collection services. While this could put pressure on margins in the short-term, we believe that Walmart’s logistics capability and its use of stores as points of distribution give it a major advantage over other players in the market, particularly Amazon.

While the U.S. is performing well, the results from the international operation are less robust. Although some of this is down to unfavorable exchange rates and the timing of Easter, which dampened sales numbers. The U.K. operation, via Asda, was particularly affected by the Easter shift. Over the longer-term Walmart’s dual approach of localizing international operations will pay dividends.

We believe that the business remains committed to disposing of Asda, most likely via a sale to a private equity firm or by spinning it off via an IOP. However, this does not need to happen with any urgency, and we believe that Sainsbury’s rather than Walmart was the main loser from the recent failure of the proposed merger.

Overall, this is a very good set of results. Walmart may be a mature and sizeable business, but it shows no signs of sluggishness or of reducing the pace of innovation and change.

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