When Walmart's stock plunged 10% in a day last month after warning its earnings next fiscal year will fall, much of the blame went to investments to fix up old supercenters and wage increases for workers. But what also played a role was a $1.1 billion investment in e-commerce, largely to compete against Amazon.
Even so, Walmart expects net income of more than $13 billion next year. By comparison, Amazon has posted profits the past two quarters totaling $171 million, mainly driven by a lucrative cloud computing business.
More than two decades into its e-commerce business, Amazon still doesn't reliably post profits from it, plowing almost everything back into growth. And Wall Street loves it, more than doubling Amazon's stock price the past year and giving it a price/equity ratio of more than 800. By contrast, Walmart's stock is down 26% the past year, with a P/E ratio under 12. Amazon has less than a quarter of Walmart's nearly $500 billion annual sales, but its market capitalization is more than $100 billion higher.
So how can Walmart compete with Amazon in e-commerce when the latter doesn't really make money at it? "It's a huge question," said Bernstein Research analyst Ali Dibadj, who said he posed it to Walmart CEO Doug McMillon following the retailer's investor presentations last month. The answer he got was that Mr. McMillon feels the market will eventually force Amazon to be more profitable. Mr. Dibadj said he isn't so sure.
Walmart's e-commerce sales have slowed from north of 30% two years ago to a projection of a "mid-teens" percentage increase this year. Its $12 billion in e-commerce sales last year pales next to Amazon's $85 billion-plus, though Amazon, which declined to comment, has seen a similar slowing in e-commerce driven by weakness in overseas markets.
Simultaneously, Walmart faces plenty of brick-and-mortar competition from the likes of Costco, Aldi, Trader Joe's and Dollar General-which have been beating it in top-line growth for years while placing far less emphasis on e-commerce. So wouldn't Walmart be better off letting others take on Amazon in an e-commerce business while it focuses squarely on its stores?
The answer is probably no, at least not in the long term.
Consider signs Walmart is winning with millennials, which could help it avert the declines of such other once-dominant retailers as Sears, Kmart and A&P.
Compared with rivals overall, Walmart fares better in terms of share of wallet with millennials. The mega-retailer nets 23.8% of millennials' spending vs. the 22.3% from U.S. shoppers overall, according to data from InfoScout, which collects data from grocery and consumables receipts scanned by its shopper panelists. Other key competitors that over-index with millennials in InfoScout spending data, such as Target and CVS, have similarly focused on e-commerce. But Costco, Aldi, Dollar General, Trader Joe's and Kroger, all of which have been outgrowing Walmart offline, have focused less on their e-commerce operations, and all under-index with millennials today.
So Walmart's e-commerce push, which had made it No. 3 behind Amazon and eBay, may well pay off long-term. But it's a very long game. Millennials represent around $200 billion of U.S. buying power today, but consumers 50 and older, who over-index with many of Walmart's rivals, represent $3.2 trillion. "Walmart has its eye on the long-term right now," said spokesman Dan Toporek. "We believe that's the most critical way to look at investment."