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Walmart Q1 Revenue Jumps But Grocery, Supply Chain Investments Weaken Profits

  • Written by  Glenn Taylor
Walmart Q1 Revenue Jumps But Grocery, Supply Chain Investments Weaken Profits

Walmart had its best Q1 comparable store sales growth in nine years, achieving 3.4% growth with total revenue climbing 1% to $123.9 billion. E-Commerce sales continued to rise, boosted by a mid-single digit expansion in online grocery offerings and strong sales in home goods and fashion accessories, which were up 37% in the U.S. during Q1. Walmart now targets U.S. e-Commerce sales growth of 35% for the full fiscal year.

Market penetration of private label grocery offerings increased by 156 basis points, or 1.56% in total, demonstrating the retailer’s continued emphasis on producing and supplying its own food. For example, Walmart is creating its own new Angus beef supply chain that will bring premium meats to nearly 500 stores by early next year.

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Walmart stocked more merchandise across the board; inventories increased 5.9% in Q1: The retailer accelerated buying in some categories and bulked up product quantities in its e-Commerce fulfillment centers as it works to deliver online orders more quickly.

The quarter has been an eventful one for Walmart: the retailer is rolling out next-day delivery on 220,000 products only a few weeks after Amazon revealed its one-day delivery investments. The retail giant also introduced Walmart Voice Order via Google Assistant, which will add items directly to shoppers’ mobile Walmart Grocery cart. Additionally, Walmart is significantly expanding its pet health care network, aiming to have 100 veterinary clinics open in its stores within the next 12 months and launching an online pet pharmacy.

These significant investments both in-store and online, as well the increase in lower margin online sales, continue to put profits under pressure. Walmart’s Q1 operating income fell 4.1% to $4.9 billion, in part because its $16 billion purchase of Indian e-Commerce giant Flipkart last year is weighing on profits, as expected. However, operating income in the U.S. did grow 5.5%, beating expectations.Adjusted earnings per share slipped 0.9% to $1.13, still ahead of the $1.02 share that had been projected.

Walmart’s wholesale unit Sam’s Club saw Q1 comparable sales growth of 0.3%, but that number increases to 3.0% when excluding tobacco, which the company stopped selling last year. E-Commerce sales at Sam’s Club grew 28% during the quarter.

Tariffs Remain Concerning, But Growing Grocery Business May Limit Impact

Perhaps the biggest concern for Walmart going forward will be tariffs, which could impact apparel and footwear sales. Walmart faces higher potential product prices after the Trump administration’s move last week to increase tariffs to 25% from 10% on approximately $200 billion of goods imported from China. With threats of further tariffs on all Chinese imports, executives have said they are working to bring in some imports earlier than previously planned ahead of rising tariffs.

The company sources approximately two-thirds of its goods domestically, largely because of its massive and growing food business. The food business may limit the impact of the tariffs, according to Charlie O’Shea, VP and Lead Retail Analyst at Moody’s: “We also believe Walmart has the wherewithal both financially and via its vendor relationships to minimize the impact on both itself and its shopping base,” O’Shea said in commentary provided to Retail TouchPoints.

The remaining one-third of Walmart’s merchandise comes from overseas, including from China.

“As we have said before, our goal is to be the low-price leader,” Walmart CFO Brett Biggs said in an earnings call. “We want to manage margins with customers and shareholders in mind. We have mitigation strategies that have been in place for months. But increased tariffs will increase prices for customers.”

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