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Why Walmart Still Has a Big Opportunity Online

NEW YORK (TheStreet) - Walmart (WMT - Get Report) is investing significantly behind e-commerce as part of its global growth plan. While an argument can be made that the Bentonville, Ark.-based company missed its opportunity by not growing its online strategy earlier given Amazon's (AMZN - Get Report) dominance, at least one analyst says Walmart still has "significant" opportunity to gain share in both domestically and abroad.

"The opportunity is significant in the U.S. and globally," UBS analyst Jason DeRise wrote in a note to clients. "The integration of digital with physical stores, while leveraging the current supply chain is critical to allow its offering to be effective, efficient, and potentially ROIC [return on invested capital] accretive if done right. In the U.S., the small store rollout is key." DeRise shares Walmart shares "buy" and has a $86 price target.

Walmart's global e-commerce sales rose by 30% last year, with the company expecting sales to rise another 30% this year. Though the number is off of a small base -- approximately $10 billion, or 2.1%, of the retailer's $473 billion in sales last year -- that shows there's plenty of room for Walmart to take share from Amazon if it's done right.

It's apparent why Walmart must focus on growing its e-commerce strategy, and getting its customers comfortable shopping online. Same store sales at the world's largest retailer are suffering. U.S. same-store sales fell 0.4% for the Jan. 31-ending year.

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Growing U.S. e-commerce sales by 15%-20% compound annual growth rate (CAGR) could add 30 to 60 basis points to Walmart's annual comparable sales, as its share of U.S. sales increases from 2% to more than 3%, DeRise estimates. In the January-ending quarter, e-commerce sales added 30 basis points to Walmart's U.S. comps and 40 basis points to Sam's Club same-store sales, he added.

Last year, Walmart spent roughly $540 million pre-tax or 11 cents a share in 2013 investing in e-commerce. This year, it plans to spend an additional 2 cents to 4 cents a share this year, DeRise wrote.

"Some of our fiscal 2014 e-commerce accomplishments included developing a new recommendation engine to further personalize search, improving the mobile shopping experience, accelerating the deployment of our global technology platform and increasing assortment offered on our websites," Walmart said in its annual 10-K filing.

"We'll invest aggressively in e-commerce and increase our small store rollout in the U.S., as we've done in several other countries, to deliver value and convenience. Today, we are announcing an increased capital allocation, above our previous forecast, to accelerate small store growth in the U.S.," Walmart's president and CEO Doug McMillon said in a press release announcing the company's fourth-quarter and fiscal year results. "The combination of supercenters and smaller formats closer to customers' homes, along with e-commerce and mobile commerce, will enable us to increase our relevance for the Walmart brand around the world."

DeRise notes just 19% of Walmart in-store shoppers shop at, compared to 53% of Walmart in-store shoppers also shopping, citing Kantar Retail data. "Winning incremental shoppers is not likely to be self-cannibalizing, since they already missed out on its customers' online spending: they were already cannibalized by Amazon," DeRise penned in the note. "Demographics data show us the shopper has similar demographics to the Walmart in store shopper on income and MSA size. The total shopper demographic skews higher income and urban."

"Walmart must drive awareness, traffic and conversion in the U.S. to catch up," he wrote.

Will the Walmart shopper adapt?

--Written by Laurie Kulikowski in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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