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Analyst: Walmart shows that traditional retail can thrive if they adapt, evolve


The second quarter numbers show that Walmart remains firmly on the front foot and is more than holding its own in a challenging and competitive retail market. It is particularly pleasing to see sales growth accelerate since Q1 -- a clear sign that the various initiatives and investments are paying dividends.

Admittedly, some of the growth numbers may seem small. The 3.3% uplift in Walmart's U.S. sales, for example, looks rather weak compared to the 17% increase in Amazon's retail sales over a similar timeframe. However, in monetary terms the gains are significant. Walmart US took $2.5 billion more than the same period last year. In this context, Walmart's performance compares favorably to Amazon, which added $3.5 billion to its retail sales line on a global basis.

One of the particular areas of success for Walmart is grocery. Our data show continued gains in customer share, even in areas where discounters like Aldi have expanded. The reason for this is mostly, although not completely, down to Walmart's continued investment in everyday low prices. As the grocery sector enters one of its toughest phases, we believe that Walmart is well positioned to make further gains. It is one of the few firms that have the firepower to cope with the push towards compressed prices and margins.

It is certainly true that investments in price, especially on grocery, have eroded gross margins. So too have the various e-commerce activities that Walmart is undertaking. However, it is also pleasing that, for the second consecutive quarter, the U.S. business managed to increase operating income, which rose by 2.2%.

Focusing more on e-commerce, we remain supportive of Walmart's efforts to boost its online business through a combination of organic growth and acquisitions. The addition of firms like Moosejaw, Shoebuy, and Bonobos not only give Walmart more of a stake in the digital marketplace but also expand its reach into higher margin categories, niche areas, and more affluent shopper segments. Although these businesses have a somewhat different position than Walmart's core operation, they still benefit from the firm's expertise in logistics and its scale and reach.

The results of the efforts made in digital are evident from the 67% increase in online gross merchandise value over the period. Acquisitions made a big contribution to this, but schemes like free two-day shipping and discounts for products collected in stores have also increased shopper numbers and encouraged more people to use All in all, we believe that Walmart is making considerable progress in online and is using its significant scale and reach through stores to its advantage.

While the home market remains robust, the international picture has also improved. In Mexico, Walmex continues to perform well with a 7% increase in comparables. However, Walmart will be most cheered by the turnaround in U.K. performance, where Asda's same-store sales rose by 1.8%. While this comes off the back of a 7.5% decline in the prior year, it is nevertheless an early sign that Walmart is addressing some of the issues that have long since plagued the U.K. operation.

All in all, we are pleased with the progress Walmart is making. We note the decline in net income, but believe that some short term erosion is necessary as the business invests in its future. In our view, Walmart is a demonstration that traditional businesses can survive and thrive in this era of retail if they are prepared to adapt and evolve.
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