Judging by its stock price, Walmart (NYSE:WMT) appears to be facing an extended battle with its bears. Shares of the world's largest retailer are stuck in the mud at the same time that competitors such as Target (NYSE:TGT) and Costco (NASDAQ:COST) have produced double-digit gains this year.
Walmart will report fiscal second-quarter numbers on Thursday, before the US market opens. On average, analysts expect the company to post a profit of $1.22 per share on revenue around $126 billion.
Ahead of its earnings report it’s a good time to ask: what's Walmart doing wrong that other retail giants are doing right.
It's All About E-Commerce
In a nutshell, it’s all about e-commerce. That’s a key battleground and market leader Amazon (NASDAQ:AMZN) is a major threat to brick-and-mortar operations. To counter that challenge, Walmart has been spending billions of dollars to acquire digital properties, reorganize its stores and train its workers.
In its biggest-ever deal, announced this year, Walmart bought a controlling stake in India’s largest online seller, Flipkart Group, for $16 billion. That follows its acquisition of e-commerce startup Jet.com two years ago.
Margins A Major Concern
Despite this massive display of financial muscle, investors are not yet willing to bet in a digital turnaround. Investors don’t know how long it will take for these invested dollars to translate into improved margins. In the short run, the impact has been counterproductive. While rising spending improved Walmart’s online sales, it has also started to depress margins. In the last quarter, Walmart's gross margin—which has fallen for four consecutive quarters—was down 23 basis points
US operating income fell 3.1% from the same period a year ago. Though the retailer is on track to expand its US. e-commerce sales by 40% for the full year, the market focus is increasingly shifting to bottom-line profitability.
As such, when Walmart reports earnings on Thursday, August 16, the two key metrics to watch will be growth in e-commerce and gross margins.
Bottom Line
We don’t think Walmart has lost its appeal for long-term income investors. The company is a reliable dividend payer with a current yield of 2.32%. It's also a great defensive stock during recessions. And despite all the turmoil created by e-commerce rush, customer traffic to its stores is still going strong, showing the strength of the company’s massive physical presence.
However, we don’t see a quick rebound for the stock. The stiff competition in the grocery space and the cultural shift to e-commerce are the headwinds that will continue to pressure profitability. That won’t go away anytime soon.