Walmart Tumbles After Slowing Online Growth Jolts Investors

(Bloomberg) -- Walmart Inc. fell the most in more than two years after delivering a disappointing annual profit forecast, sparking fears that its bid to catch up with Amazon.com Inc. online is losing momentum.

The world's largest retailer expects earnings of $4.75 to $5 a share this fiscal year, excluding some items, compared with an average Wall Street estimate of $5.13. Though Walmart's sales last quarter topped projections, the results reflected a slowdown in online orders -- a key metric in its battle to fend off Amazon.com Inc.

“We were a bit lower than plan” in e-commerce, Chief Financial Officer Brett Biggs said in an interview. “We had a few operational issues from an inventory replenishment perspective,” he said, declining to provide specifics.

The shares fell as much as 9.5 percent to $94.80 in New York Tuesday, the biggest intraday decline since October 2015. They had gained 6.1 percent this year through Friday's close.

Walmart can't afford to lose ground as rival Amazon poaches shoppers and pushes into new arenas like health care, which has prompted a scramble of consolidation including the union of CVS Health and insurer Aetna Inc. On Tuesday, grocer Albertsons Cos. said it would buy the part of drug-store chain Rite Aid Corp. that isn't being sold to Walgreens Boots Alliance Inc. Insurer Humana Inc. and drug-plan administrator Express Scripts Holding Co. could also be potential takeout targets, according to analysts.

Read more: Walmart's bad day drags down staples stocks

“There's a lot of retail consolidation happening, and it will continue to happen,” Biggs said. “Health care is really important to us. If there are ways to serve our customers better, we will look at that.”

Online Sales

At the same time, Walmart Chief Executive Officer Doug McMillon is trying to convert the company's brick-and-mortar shoppers into online customers, who spend almost twice as much overall and seek out higher-priced items.

At Walmart's e-commerce unit, sales rose 23 percent last quarter. That's less than half the pace of previous periods. The Bentonville, Arkansas-based company had been getting a tailwind from its acquisition of Jet.com, an online upstart that it bought in 2016. Still, the company maintained its full-year forecast for online sales growth of about 40 percent.

The company needs to widen its e-commerce base, especially among younger and professional demographics, said Neil Saunders, managing director of research firm GlobalData Retail.

“They do not associate Walmart with online or they default to Amazon,” he said in a note. “This is a tough nut for Walmart to crack, and one that it can only break by more heavily marketing its services and proposition.”

Gross Margins

McMillon is also trying to keep employees happy by raising wages and enhancing parental-leave policies, while at the same time closing stores and cutting headcount at its headquarters. Those investments, together with lowering prices, are taking a toll on profit. Gross profit margins in the U.S. contracted by 50 basis points in the quarter, said Biggs, who added that he doesn't see that level of decline continuing.

“There was some sacrifice in gross margin in the quarter, which we attribute to holiday promotional activity in the U.S., as well as the impact of the ongoing price-driven market share battle with Amazon,” Moody's Corp. analyst Charlie O'Shea said in a note.

Earnings Shortfall

Walmart's adjusted earnings amounted to $1.33 a share in the fiscal fourth quarter, which ended Jan. 31. That was short of analysts' average projection of $1.37, and was partly due to pulling forward some investments to take advantage of a greater tax deduction, the company said.

One bright spot was same-store sales, which grew 2.6 percent during the quarter, compared with the 2 percent projection tracked by Consensus Metrix. The increase was fueled by sales of food, apparel and toys such as Lego and Hatchimals, Biggs said.

At Walmart's e-commerce unit, sales rose 23 percent last quarter. That's less than half the pace of previous periods. The Bentonville, Arkansas-based company had been getting a tailwind from its acquisition of Jet.com, an online upstart that it bought in 2016. Still, the company maintained its full-year forecast for online sales growth of about 40 percent.

The company also cut its full-year net sales growth forecast by as much as half to a range of 1.5 percent to 2 percent, due to its decision to halt tobacco sales in some Sam's Club warehouse locations and shutter part of its Brazilian e-commerce business. The company also closed 63 Sam's Club units last month.

Walmart said it's still assessing the impact of last year's federal tax changes -- legislation that's expected to bring huge benefits to the nation's retailers. For now, the company is recording a provisional benefit of $207 million for the fourth quarter and full year. It sees an effective tax rate of between 24 percent and 26 percent, which is “a little higher than some expected,” Biggs said in the interview.

The company said it expects a cash benefit of about $2 billion for the year as a result of the tax overhaul.

To contact the reporter on this story: Matthew Boyle in New York at mboyle20@bloomberg.net.

To contact the editors responsible for this story: Crayton Harrison at tharrison5@bloomberg.net, Nick Turner, Lisa Wolfson

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