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Retailer Walmart (NYSE: WMT) $ 16 billion earlier this year to buy 77% stake in the Indian company e-commerce Flipkart. This decision could very well pay dividends to Walmart, but for now, it is hurting the profitability of the company.
Walmart lowered its forecast of annual results for Tuesday due to the impact of the deal. The company also expects earnings per share to decline in fiscal year 2020.
Source of the image: Walmart.
Short-term pain
Walmart is still expecting its total sales to increase by about 2% this year, adjusted for the currency. And the company sees its growth accelerate to 3% during the fiscal year 2020, despite the headwinds of Walmart Brazil and an expected reduction in tobacco sales.
US activity should continue to perform well. Walmart expects US Walmart and Sam's Club to post comparable year-over-year fuel-free sales growth of 3% and about the same growth as in fiscal year 2020, the exclusion of fuels and tobacco. Flipkart will boost international business, and sales are expected to increase 5% in fiscal year 2020.
But Flipkart should weigh on Walmart's profits. The company lowered its adjusted EPS outlook for the full year to a range of $ 4.65 to $ 4.80 from a previous range of $ 4.90 to $ 5.05. During fiscal year 2020, Walmart finds that this measure decreases by a single digit percentage. If Flipkart is excluded, adjusted EPS would increase by a percentage between 1 and 5% during the 2020 fiscal year.
A slowdown in electronic commerce
US e-commerce activity will slow slightly in fiscal year 2020. Walmart is forecasting growth of 35%, down from the company's expected 40% growth this year. Walmart has invested heavily in e-commerce over the last few years, but measures have recently been taken that could hurt overall sales growth. The Wall Street Journal reported in August that Walmart had started posting "out-of-stock" status on products that were too expensive to ship in a cost-effective manner. And earlier this year, Walmart reportedly asked suppliers to focus on items over $ 10, which could boost e-commerce profits but hurt sales.
Walmart's e-commerce strategy includes online grocery delivery and pickup. The company plans to support the delivery of grocery stores in 3,100 stores by the end of fiscal year 2020, with grocery delivery being possible in 1,600 stores. The grocery store pickup was available in 1,800 stores at the end of the second quarter. Walmart plans to double the availability of this service.
In addition to competing with Amazon, Walmart faces new aggression Target (NYSE: TGT). Target has set up a two-day free shipping, a home delivery service for the essentials the next day and a same-day delivery for the grocery store. The retailer also lowered its prices, which includes the new brand of Smartly low-priced household items. Target increases online sales at a rate of 40% and uses its stores to fulfill most online orders.
The expected 35% growth in e-commerce at Walmart is still a strong figure. Amazon's first-hand online sales, which exclude its vast third-party market activity, grew only 12% in the second quarter. Walmart can eventually catch up with Amazon on this front if it manages to maintain its growth rate.
Take it in stride
Walmart shares opened higher on Tuesday, so investors do not seem to care about forecasting lower profits and slowing online trading. Flipkart's investment is a long-term bet on India, and investors may be willing to accept lower profits today for potentially higher profits tomorrow.
Tuesday, Walmart is holding its annual meeting for the investor community. Executive Director Doug McMillon will detail all of the company's initiatives. Third quarter results will follow Nov. 15. The stock is down slightly after rising about 55% since the beginning of 2016. Stocks currently trading at around 20 times the middle of Walmart's adjusted earnings guidance for the full year, gains additional could be elusive until the return of earnings growth.
John Mackey, CEO of Whole Foods Market, an affiliate of Amazon, is a board member of The Motley Fool. Timothy Green has no position in the mentioned actions. The Motley Fool owns shares and recommends Amazon. Motley Fool has a disclosure policy.
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