WMT Walmart Inc

By Jinjoo Lee 

Walmart tries to live by its twin mottoes of Everyday Low Prices and Everyday Low Costs. The latter has been a challenge, but investors should take it in stride.

The retailer reported Tuesday that total revenue jumped to $134.6 billion for the fiscal first quarter, which ended April 30 -- an 8.6% increase compared with a year earlier. Both its top and bottom lines exceeded analysts' expectations. Of particular note was Walmart's e-commerce sales, which grew by 74% year-over-year -- a substantial acceleration from the previous quarter's pace of 35%. Walmart shares gave back early gains to rise only modestly by midday, though.

Investors might be wary of Walmart's cost of sales, which grew 9.7%, also topping estimates and putting a damper on operating income growth. Walmart said Covid-19 related costs -- increased wages, benefits and heightened sanitation measures -- added up to nearly $900 million during the quarter. The shift to e-commerce already had been a drag on profitability even before the pandemic. The company also said gross margins were negatively affected by a shift to sales in lower-margin categories such as groceries and consumables.

One obvious solution to the margin problem is to simply sell more, as Walmart U.S. Chief Executive Officer John Furner pointed out on the retailer's last earnings call. Revenue was on a steady growth trajectory well before the pandemic; the sudden e-commerce boost is already having an effect on operating income, which grew by 5.6% in the first quarter compared with a year earlier after the previous quarter saw a 12.3% year-over-year drop. Evercore ISI estimates that Walmart's operating margin will rise in the next two to four years as grocery pickup turns profitable.

Since mid-March there has been a fourfold increase in new customers for pickup and delivery, and Walmart has seen indications that those customers are returning. A customer who shops in both the physical store and through the Walmart app or website spends twice as much as a customer who shops in stores only, the company said during its last earnings call.

Walmart's in-person experience also seems relatively well-positioned to thrive in a low-contact world. Its supercenters, many of which are open 24 hours and average 178,000 square feet, might reassure customers skittish about keeping a safe distance from others.

Some of Walmart's added costs will bleed into coming quarters. It already announced a second round of associate bonuses, which will affect second quarter results. But the rush of new customers should go a long way toward offsetting those costs in the long run as the company makes more higher-margin goods available for pickup and delivery.

Much of this already is priced into Walmart's shares, which last month reached an all-time high and have outpaced the broad U.S. market by 17 percentage points this year. Tuesday's lukewarm response to a solid beat shows some skepticism about its ability to keep growing its top line quickly enough to deal with the rising cost of doing business after the rush of pandemic business fades.

Investors should have more faith.

(END) Dow Jones Newswires

May 19, 2020 13:10 ET (17:10 GMT)

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