Wal-Mart Sees Margins Fall From Price Cuts and E-Commerce Investments

Wal-Mart Stores, Inc reported that price cuts and heavy e-commerce investments has contributed to lower quarterly margins. Investors shrugged at an increase in comparable sales—for the third straight year—to push shares down nearly 3 percent.

According to Wal-Mart Chief Financial Officer Brett Biggs, “Strategic price investments in key markets and the growing mix of our e-commerce business reduced the gross margin rate.”

Looking more closely at the data, both online and store business is up. Store visits in the US grew from 1.2 percent last year to 1.3 percent this year. As a matter of fact, business at stores open at least a year, in the United States, grew by 1.8 percent—not including fuel price fluctuations—in the quarter ending July 31. Consensus Metrix research firm notes that this was actually stronger than they had expected. In addition, online sales growth outpaced the rest of the industry—at a whopping 60 percent—but was still slower than the 63 percent increase from the preceding quarter.

But its not all sunshine and roses for the retailer. One weakness, at least in the second quarter, is that profit margins have fallen a little. Sales are up, sure, but aggressive marketing and promotions has eaten into the profits a little. Wal-mart has always focused on competitive pricing, but with more and more people turning to far less costly online options, the retail giant has had to put a little more effort into customer retention (and transition to its online outlet).

Still, Wal-Mart CEO Doug McMillon remains confident. He says, “Our customers are responding to the improvements in stores and online, and our results reflect this. Traffic increases at store level and the eCommerce growth rate are key highlights.”

Also, Moody’s lead retail analyst Charlie O’Shea comments, “As Walmart is a key player across most back-to-school/back-to-college product categories, and we are in the heart of those seasons, we would expect further promotional activity in Q3, with smaller retailers to feel increased levels of stress as Walmart and Amazon continue their battle over market share.”

Overall, the company’s gross margins were down 11 base points—to 25 percent—which includes a five-base point fall in the US. Furthermore, operating margins are down from 5.1 percent to 4.9 percent with US operating expenses up 3.9 percent.

At the end of the day, Wal-Mart increased its low end full year earnings outlook from $4.20 per share to $4.30, not including items, while holding on its high end outlook at $4.40.

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