The Ratings Game: Walmart’s e-commerce business needs to go beyond grocery despite 41% quarterly growth, analysts say

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Walmart needs to sell more non-food merchandise online, analysts say

Walmart Inc.’s 41% e-commerce growth in the third-quarter was the best quarter of sales growth for its online channel this year, but much of the gain came from grocery, which GlobalData Retail argues shows a need to branch out into other categories.

Walmart WMT, -0.52%   reported profit that beat expectations and raised its earnings guidance for the year. However sales and comparative sales were a miss.

GlobalData Retail also called out the 5.4% operating income decline to $4.72 billion from $4.99 billion last year.

“To change this, Walmart needs to improve its position in non-food, especially online,” wrote Neil Saunders, managing director of GlobalData Retail. “Driving a greater volume of higher-margin general merchandise via e-commerce is critical to bolstering operating numbers.”

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Walmart executives recognize the need, with Marc Lore, Walmart’s U.S. e-commerce chief, saying on a Thursday premarket call with the media that home and fashion are two focus areas.

Walmart had acquired a number of digitally-native fashion brands in recent years, including menswear retailer Bonobos, but has shed some of those names, like Modcloth, the women’s e-commerce site.

“We’ve evolved the strategy to focus more on incubation than acquisition,” Lore said.

GlobalData’s Saunders notes the shift in attention to these non-food items, and says the retail giant is attracting new customers. But it’s happening slowly.

“A lot of non-customers still view Walmart as a low-price player and not as a destination to get reasonable quality non-food items,” Saunders said. “Moreover, many lucrative online shopper segments remain wedded to Amazon, especially if they are members of its Prime program.”

In addition to these e-commerce hurdles, Saunders highlights the growing cost of competing with Inc. AMZN, -0.16%   on faster shipping and, increasingly, grocery; the investments necessary to maintain Walmart’s low-price dominance in the face of competition from deep discounters; and the ongoing tariff issues.

See: Amazon eliminating the $14.99 fee for grocery delivery to Prime members

“It remains a long-term winner, but there is likely short-term pain ahead,” Saunders said.

Other analysts were more bullish following the earnings announcement.

“What matters here, in our view, is that Walmart continues to generate positive traffic at its stores and robust in e-commerce sales growth while delivering no negative surprises on margins or EPS,” said John Zolidis, president of Quo Vadis Capital. “This demonstrates that Walmart continues to execute on a strategy that is both benefiting from the current strong consumer environment and is also positioning the company to take share over the long term.”

Operating margin rose 21 basis points, which was a good sign to Charlie O’Shea, Moody’s vice president, in the face of what looks to be a very promotional holiday season.

“Walmart will again be one of the primary pacesetters, particularly when considering its increased leveraging of its massive store base for online pick-up and accelerated shipping, especially in food, which will ripple into other higher-margin categories,” O’Shea said.

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Instinet maintained its buy rating and $132 price target.

“The key one-line takeaway, in our view, is that most important metrics, including U.S. comps and traffic, e-commerce growth, and operating profits, as well as total company profits accelerated from last quarter and, in most cases, were in fact the best of the year,” analysts led by Michael Baker wrote.

And though UBS was upbeat overall about the result, analysts raised an alarm about the future.

“Looking ahead, Walmart U.S. compares get tougher, and holding its two-year stack constant would imply that it will comp up 2.5% in Q4,” analysts led by Michael Lasser said.

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The FactSet consensus is for U.S. comparative sales to rise 2.7%.

“So we are mindful of the near-term potential for deceleration,” UBS wrote. “This aside, Walmart continues to separate itself from other retailers.”

UBS rates Walmart stock neutral with a $115 price target.

Walmart shares have rallied more than 30% for the year to date while the Dow Jones Industrial Average DJIA, -0.25%   has gained 19% for the period.

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