Walmart Q1 Proves Out Omnichannel Focus

Walmart detailed strong U.S. quarterly sales and comp gains on a foundation of surging omnichannel grocery—but signaled uncertainty about the economic climate ahead as the severity and length of the coronavirus crisis continues to weigh on costs and operations.

For the fiscal first quarter, which began in February and ended April 30, the Bentonville, Ark.-based retailer said its U.S. sales jumped by 10.5% to $88.7 billion. Same-store sales increased by 10% and reflected a 16.5% increase in average ticket and a decline of 5.6% in transactions. U.S. e-commerce led by grocery increased by a whopping 74% and contributed nearly 4% to the comp figure.

Walmart also incurred about $900 million in new costs to adjust to the pandemic during the quarter, including worker and facility safety measures and worker bonuses. Combined with a mix change toward lower-margin food and consumables, gross margins were down slightly. And given uncertainty, the company withdrew previously issued financial guidance for the fiscal year.

“Due to the health crisis, the first quarter had the broadest set of challenges we’ve ever faced globally, including varying government regulations, significant sales variability, mix shifts and channel shifts due to changing consumer habits,” Chief Financial Officer Brett Biggs said in a conference call discussing results. “All of this led to significantly higher-than-anticipated sales but lower gross-margin rates and higher expenses.”

The onset of the pandemic in March proved to be something of a testing ground for a Walmart e-commerce infrastructure that has grown rapidly since its $3.3 billion acquisition of would-be rival Jet.com in 2016. Ironically, Walmart withstood this test while officially retiring the Jet brand, which never became the urban e-commerce power player envisioned by Walmart, but did produce its e-commerce CEO, Marc Lore.

“While the brand name may still be used in the future, our resources, people and financial have been dominated by the Walmart brand because it has so much traction,” CEO Doug McMillon said. “We’re seeing the Walmart brand resonate regardless of income, geography or age. The Jet acquisition was critical to jump-starting the progress we've made the last few years. Not only have we picked up traction with pickup and delivery, but our Walmart.com nonfood e-commerce growth accelerated after the arrival of Marc and the Jet team. He leaned into the Walmart brand quickly.”

Walmart’s e-commerce offering—built on grocery pickup but increasingly moving toward a full-store experience through the launch last week of a united grocery and general merchandising shopping app—is resonating with consumers particularly during the crisis, McMillon said. He twice mentioned in remarks to analysts that the company should stop calling its store-based offering “online grocery.” Filling out online baskets with higher-margin general merchandise items is one key to improving the economics of online fulfillment. Walmart mentioned that e-commerce losses had moderated and reflected in a 3.9% increase in overall operating margins in the quarter.

“Before this crisis, we were already seeing robust adoption of online pickup and delivery. As this crisis created a need for social distancing and required people to stay at home, customers embraced pickup and delivery even more. Pickup and delivery are attracting greater numbers of new customers. The number of new customers trying pickup and delivery has increased four times since mid-March.”

U.S. CEO John Furner said the company was “monitoring” food price inflation in categories such as proteins impacted by COVID-related plant shutdowns and slowdowns. “Fortunately, the Walmart merchandising team, is a very qualified team, and they will be able to do a number of things to help customers in any way possible to maintain values in the stores," he said. 

Furner added, however, that price investments previously contemplated by the company would likely come later in the year as priorities have shifted to getting store inventories back into shape—although food is more or less up to date, with the exception of some proteins. “All across the company, we’ve had unprecedented demand in a number of categories. And at the current time, our focus is to get our inventory levels back to a level that we can serve customers all across the country each and every day. We have in our plan still price investments planned later in the year. However, due to the changes and everything we’ve gone through so far this year, we’ll be taking those decisions later in the year," he said. 

Biggs said the $900 million bill for added COVID expenses in the quarter was about three-fourths related to bonus payments to workers, but he warned investors not to assume such costs would dissipate in the current period. Added expenses for sanitation and inventory replenishment “will likely carry on for some time.”