Sometimes companies decide to compete full-on with another big player in a specific business. Walmart (WMT) - Get Report is playing that game and the market is already viewing the big-box giant as a formidable threat in its new venture.
Walmart is reportedly launching Walmart+, a direct competitor to Amazon Prime. Walmart+, a subscription e-commerce service, will price at $98 a year and will offer groceries, fuel discounts at Walmart gas stations, various other types of product categories and other perks at Walmart. Amazon Prime is priced at $119 a month. The launch is expected later in July.
Walmart shares rose as much as 6% to $126 a share. Amazon (AMZN) - Get Report shares fell 1% to $3,026, while large cap tech stocks were flat-to-up by mid-afternoon. And while large cap consumer staples stocks rose slightly in Tuesday’s mostly risk-off market, Target (TGT) - Get Report, which has excellent digital operations, saw its stock fall 0.5% to $118.
Walmart, which has grown its e-commerce capabilities to investors’ satisfaction over the past few years, is cash strapped and able to almost match Amazon on its value-add to customers. Maybe Walmart’s e-commerce business isn’t nearly as large as Amazon’s is, and of course Amazon currently has a slight scale advantage, but Walmart is no slouch.
Walmart has already been able to provide one-day delivery and has become a big groceries player. Fast delivery requires, among other attributes, fulfillment centers, people and an efficient and streamlined process for getting product from its cite to the customer and Walmart has shown it has those boxes checked. While Amazon relies heavily on fulfillment centers, big-box-centric businesses like Target and Walmart can ship from stores, allowing them to leverage their existing businesses to execute e-commerce capabilities.
For its current fiscal year, Walmart is expected to see 5% same-store-sales growth, according to FactSet estimates, as essentials product categories like groceries and e-commerce have both seen a tailwind as people stay at home during the pandemic. E-commerce, specifically, may see a long-term tailwind as new users become permanent ones. While the S&P 500 is down 3% year-to-date, Walmart is up almost 6%. Heavy costs to satisfy intensified e-commerce needs and health and safety costs have weighed on profits in 2020, but not enough to stop earnings from growing. Analysts are looking for Walmart to sustain a 3% same-store-sales clip for the next several years.
What improved e-commerce capabilities have done for the group is stabilize revenue. People won’t necessarily buy a higher number of grocery items in a given period of time than they usually do, but if they’re on track to buy online more than they buy in-store, then e-commerce will be a stabilizer for Walmart.
But as Walmart comes close to matching Amazon on online and convenient selling, there is some possibility that Walmart could take enough market share in the overall grocery market that sales growth could become more robust than current expectations. Walmart may be trying to reach a younger customer, but that remains to be seen and clearly, the company is trying to provide a platform for some discount selling. Joe Feldman, retail analyst at Telsey Advisory Group, recently told TheStreet e-commerce-driven market share gains for big grocery players could spur slightly higher expected growth rates, which the multiple of the stocks could reflect. That’s one factor to watch as analysts sharpen their pencils on modeling how additive Walmart+ will be to the company.
At the very least, the most important factor to watch will be the revenue and earnings contribution from the business. Analysts will surely be out with updated forecasts. In the short-term, some analysts may find that ongoing investment may weigh on profits, as is usually the case with new projects like these, although the launch is indeed around the corner.
Walmart shares are trading at 25 times the next 12 month’s projected earnings per share, a touch rich from where Walmart’s valuation usually sits, but that’s because of the big up-move Tuesday. If one-year earnings estimates move up by a few percentage points and the near-term stock gains abate, the multiple will ease. Whatever an investors’ entry point is, Walmart stock is, at the very least, a highly defensive and quality name. It has proven its ability to invest in the most current way to operate a retail business, generate cash, and return cash to shareholders. Importantly, the dividend yield is just 1.7%, although that’s strong compared to the treasury market.
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