Walmart’s earnings: Navigating the trade war

Walmart Stores Inc. was a major gainer in the Dow Jones Industrial Average Thursday after it posted better-than-expected results at its United States division during the first quarter. The largest retailer in the US hinted at the possible impact of the US-China trade dispute and showed how it is capitalizing on its brick-and-mortar locations to compete with its top online rival, Amazon.

Walmart stores are located within 10 miles of 90 percent of the US population – a footprint that helps the company quickly fulfill online orders.

On the potential impact of the US-China trade war, Walmart CFO Brett Biggs said his company is monitoring the tariff discussions and hopes both sides can reach an agreement. “We will actively manage pricing and margins as warranted,” Biggs said, adding that Walmart has been eyeing the situation for months to devise “appropriate mitigation strategies”. He didn’t elaborate, but reportedly told financial news network CNBC that “tariffs will increase” prices for shoppers.

The administration of US President Donald Trump is considering levying a 25 percent tariff on an additional $300bn worth of Chinese imports. Analysts say higher tariffs will put pressure on US retailers. In a report released this month, UBS analyst Jay Sole said the potential tariff could hurt US apparel retailers to the point where “major store closures” become a real possibility.

Two-thirds of merchandise made by Walmart’s US division is manufactuered, assembled, sourced or grown domestically, the company has said.

“Walmart has the wherewithal both financially and via its vendor relationships to minimize the impact,” writes Moody’s analyst Charlie O’Shea.

Walmart’s US division accounts for about two-thirds of the company’s business. At both physical and online registers, Walmart US sold $80.3bn worth of goods and services in the quarter that ended April 30, a 3.3 percent increase.

Comparable Walmart US sales rose 3.4 percent. Investors closely watch this number, which is a measure of results from stores open for at least 12 months.

Evolving Consumer Tastes

A key driver of Walmart’s growth was the company’s web division: Walmart’s US online sales jumped 37 percent, thanks to consumers buying more groceries online.

Walmart’s US division has more than 4,700 locations and allows shoppers to pick up online grocery orders from about 2,450 of its stores. By the end of this year, the company says this service will be available in 3,100 stores

One thousand Walmart stores also offer same-day grocery delivery, and that number will rise to 1,600 by December, the company said.

Battling Amazon

The grocery business is a key retail battleground. These companies hope that by getting consumers to buy groceries and other essential goods, they will also purchase other items like apparel and home goods. Walmart’s ability to tap into its physical stores to fulfill online orders could give Walmart a potential leg up over Amazon, whose grocery-related physical footprint includes about 500 Whole Foods stores and 12 “Amazon Go” checkout-free convenience stores.

Last month, Amazon announced it is spending an additional $800 million alone this quarter to make one-day free shipping the “new norm” for its Prime members.

In an apparent swipe at its rival, this week Walmart announced it will add free next-day delivery without the need for membership. The new initiative will begin in Phoenix and Las Vegas before eventually expanding to reach 75 percent of the US population this year.

With more consumers using smart speakers, the retail giant has introduced a service that it calls “Walmart Voice Order” and that allows consumers to use Google Assistant to do grocery shopping and build a list of desired items.

“We’re continuing our transformation to become more of a digital enterprise,” Walmart President and CEO Doug McMillon said in prepared remarks.