The retail giant once again raises the possibility of higher prices due to tariffs
Walmart Inc. has found a new way to save millions of dollars: Switch the floor wax it uses in its stores.
According to the retail giant’s Chief Financial Officer Brett Biggs, Walmart WMT, +0.78% switched to a new floor wax that’s both cheaper and more effective, reducing the number of times the floors have to be buffed.
“That one change in floor wax will save us over $20 million a year,” he said, according to a FactSet transcript of the company’s Tuesday investment community meeting. “So these small differences can make a big difference to Walmart.”
That is just one example of the ways the company is approaching how it spends, and finding ways to modernize its operations.
“The allocation of capital is quite different from before and aligned with how we’ll serve customers in the future,” Biggs said. “We’ve shifted spending away from new stores and clubs in the U.S… and have allocated more capital to e-commerce, store remodels, supply chain and technology. And this is roughly the type of allocation I think you can expect over the next couple of years.”
In his remarks, Chief Executive Doug McMillon emphasized the “cultural change” that’s happening at Walmart, emphasizing things like the use of blockchain for food safety and the removal of emissions from its supply chain. He also talked about the trial-and-error that it takes for some of the changes to be successful.
“Of course some of the things we’ve tried didn’t work or haven’t worked yet,” he said. “We tried grocery delivery with Uber and Lyft, but switched to others as we all learned it’s different to move a grocery basket than it is to move people or a restaurant order.
“We don’t have the right model to scale associate delivery yet, but it makes sense, so we’re working on the next iteration,” McMillon said.
Analysts left the meeting upbeat about the path Walmart is on.
“Walmart is seizing the moment to transform through innovation and utilization of unique store, grocery and people assets,” wrote Cowen analysts led by Oliver Chen, in a note.
The retailer’s most “important weapons” include its use of 4,761 U.S. locations to execute delivery service (there are also 597 Sam’s Club locations, according to the company website), its academies that will train 500,000 associates in 2018 and its pharmacy relationships. These are also traits that make the company “un-Amazon-able,” the analysts said.
Cowen rates Walmart shares outperform with a $115 price target.
Walmart cut its profit outlook for the year, and Cowen concedes the medium-term pressures that could drive gross margin headwinds and earnings pressure. But analysts think the guidance is “achievable and beatable.”
J.P. Morgan analysts said the company’s risk-taking and ability to invest puts it ahead of the competition.
“Management continues to play long ball with top-line taking priority over profit dollar growth (though ample expense reductions ahead make it easier for the company to prioritize sales growth),” analysts wrote.
J.P. Morgan also highlights the “numerous” cost-efficiency opportunities Walmart has, its continuing effort to build out its merchandise assortment — most recently with the acquisition of online lingerie company Bare Necessities — and increasing delivery speed over the next couple of years.
Analysts also noted how Walmart is handling the threats from tariffs.
“Walmart will take a balanced approach with some price increases, some pushback on vendors, some sourcing changes and some margin degradation,” J.P. Morgan wrote in a note.
Walmart’s Biggs said the retailer procures two-thirds of its U.S. purchases domestically. Walmart, along with Target Corp. TGT, -1.62% and other retailers, have warned that tariffs will drive up the cost of goods for shoppers.
“[W]e’ll do everything we can not to raise prices, but there are certain environments where we would raise prices because of those tariffs and we’ll have to manage margins in a way and price in a way that makes sense for customers and shareholders,” he said.
J.P. Morgan rates Walmart shares neutral with a price target of $108.
Quo Vadis Capital President John Zolidis said Walmart is transforming from a traditional retail model to one that optimizes its assets, like its stores, for customer transactions, whether online or in a brick-and-mortar location.
“We believe this strategy (which is being coupled with retail fundamentals including reinvestment in price and labor) is working based on the current top-line momentum in both the store business as well as in e-commerce sales growth,” the Quo Vadis note said.
Even though it’s unclear when margins and returns will rise, “most important, in our view, is that Walmart continues to grow comps and take share, and that it positions itself for the long term in an environment that has radically changed relative to the one for which its model was originally designed.”
Walmart shares are down 2.2% for the year to date, but have rallied 12.3% for the past 12 months. The Dow Jones Industrial Average DJIA, -0.36% is up 9.8% for the past year.
