Walmart raises outlook on stronger US performance

Date : 18 August 2016

We review Walmart’s second quarter results and the factors behind its improved performance. 

Walmart’s total revenue increased by 0.5% to $120.9bn in the second quarter, with net sales at its US stores and Sam’s Club (ex-fuel) increasing by 3.1% and 0.4% respectively. International sales were down 6.6%, impacted by foreign currency (up 2.2% on a constant currency basis). Consolidated net income attributable to Walmart increased by 8.6% to $3.7bn.

Our take: delivering critical improvements with its US and ecommerce operations

The two key standout figures in the second quarter results are the improvement in comp store sales in the US, reflecting two years of positive results, and the uptick in its ecommerce business, reversing the trend of declining growth that has been seen over a number of quarters. Getting the US business back on track has been critical given that it accounts for almost two-thirds of sales, and three-quarters of its operating income. A stronger performance here, justifies the investments which Walmart has made in its associates, and provides the resources for it to continue investing in ecommerce and tackling the trading challenges that it faces in a number of its major international markets. Following these results, the retailer lifted its profit outlook for the full year.

While the retailer’s strategic partnerships and investments with JD.com and Jet.com respectively will continue to gain the headlines, the reality is that it will take some time before these deals have a material impact on the performance of its ecommerce business. Therefore, the improvement seen in the second quarter will provide the leadership team with the confidence to continue with its strategy of building out its fulfilment network, expanding its product catalogue and leveraging its store and club networks for pickup. What these deals provide is a stronger platform for future growth in two key markets, namely the US and China.

US: two years of positive comp store sales

Comparable store sales in the US increased by 1.6%, its eighth consecutive quarter of positive sales growth. This included a 1.2% improvement in traffic, while ticket was up 0.4%. These results represent a solid improvement on the 1.0% growth in comp sales recorded in the first quarter, comparing very well against Target which recorded a decline of 1.1% in Q2 earlier this week, and generally lacklustre results across the broader retail sector in the US. The Neighborhood Market format continues to out-perform with comp store sales up 6.5%. Market food deflation negatively impacted food comps by approximately 100 basis points, while the retailer saw strong results in home, toys, and sporting goods.

US: seeing the benefit of fixing stores and improving associates pay

These results demonstrate the impact of sequential improvements which continue to be delivered in terms of the customer experience. Under the leadership of Greg Foran, Walmart has focused on improving the retailing basics, including the in-store environment, testing a new vision for its Supercenters including the fresh food experience, and improving customer service. Improvements to pay and training opportunities have been a key element of this, along with significant changes to in-store processes which saw comp store inventory decline 6.5% in the quarter, and in-stock levels improve. Walmart has also activated a new price investment campaign, which is also likely to have been a key component of the improvement in traffic during the quarter.

International: Walmex setting the pace

Internationally, net sales declined by 6.6% to $28.6bn, reflecting the impact of currency, with sales up 2.2% on a constant currency basis. Nine of its 11 markets delivered positive comp store sales, with Walmex leading the growth with sales up 7.3% as it saw strong momentum across all formats. This included Sam’s Club, where the retailer delivered solid member base growth, reflecting the improvements made to drive membership value.

International: comp sales growth slowing in Canada but making market share gains

In Canada, comp store sales increased by 1.1%, a marked slowdown on the 6.7% growth recorded in the first quarter. After a strong performance through 2015, the retailer is facing tougher comparables, although the business continued to gain market share in food and consumables and health and wellness. Walmart Canada has also been investing in pricing, funded through improvements to store productivity and cost reductions driven through its cost analytics program. Against a backdrop of lower inflation, price competition is intensifying as the focus shifts to driving volume.  

International: trading environment in UK, China and Brazil remains challenging

In the UK, comp store sales declined by 7.5%, with traffic down 6.0%. Structural shifts driven by the growth of hard discounters and intense price competition led to continued food deflation across the market, although the business remains focused on improving retailing basics through ‘Project Renewal’, which is supported by programs to drive operating costs and cost of goods savings. In China, comp sales declined by 0.5%, with the retailer seeing deep discounting by online competitors during sales events. However, new stores continue to improve, and the outlook remains positive given the alliance with JD.com which was announced in June. This will enable the retailer to deliver a more powerful combination of ecommerce and store-based retailing. In Brazil, although comp sales increased by 4.7%, this was fuelled by inflation, with ticket up 8.2%, while traffic fell by 3.5%.

Ecommerce: showing strong progress versus Q1

Ecommerce sales increased by 11.8%, a solid improvement on the 7.0% growth recorded in the first quarter, with US results stronger than those in its key international markets. This was mainly due to the growth in its marketplace proposition, with 7m new items added bringing the total on Walmart.com to 15m, the continued roll-out of online grocery, and the growth of pickup at its stores and clubs. Grocery ecommerce pickup has been extended to 400 locations across 60 US markets, with the service continuing to receive high customer satisfaction scores.

Ecommerce: strategic investments to better position Walmart in the US and China

To better position the business for the future in the priority markets of the US and China, Walmart has made two strategic decisions. In the US, its announced earlier this month, plans to acquire Jet.com. This should help Walmart reach more customers and drive a higher level of growth more quickly, with Walmart looking to leverage Jet.com’s technology to deliver the lowest cost basket online. Once the acquisition is completed, Marc Lore, current President and CEO of Jet.com will join Walmart as the new President and CEO of ecommerce with responsibility for both the Walmart and Jet brands in the US. Neil Ashe, Walmart’s current President and CEO for Global Ecommerce will remain with the business until the end of the year. In China, the retailer’s recently announced transaction with, and investment in JD.com will also help to extend the reach of its brands to a significantly wider customer base.

Sam’s Club: comp sales growth ahead of expectations

Net sales at Sam’s Club decreased by 1.3% to $14.5bn, reflecting lower fuel prices, with comp store sales up 0.6% (ex-fuel). Market deflation accelerated from Q1, impacting comp store sales in food by approximately 100 basis points. The business continues to make solid progress with enhancements to its membership programs and its range of ecommerce initiatives, including Club Pickup and the direct to home business. The retailer is also improving the in-club experience, with its new Scan & Go program extended to around 240 clubs as it embarks on a national roll-out.




Stewart Samuel, Program Director, IGD Canada
Based in Canada, Stewart heads up all of IGD's research and coverage on Walmart globally. He is also responsible for shaping IGD's research program across North America. Contact Stewart at [email protected] for further insight on the retailer and the region.
@Stewart_IGD