As Walmart grows in e-commerce, investors look for a plan to stem the losses

Business

As Walmart’s online sales grow, the retailer has seen another number grow, too: Its e-commerce losses. OR As Walmart’s online sales grow, the retailer has seen its e-commerce losses grow, too.

Analysts are waiting to see whether those losses have peaked or if they’ll continue to rise.

The Bentonville, Ark.-based retailer is spending heavily to compete against Amazon. It’s seen that pay off with significant sales growth, especially in its grocery business. Walmart’s e-commerce sales in the U.S. grew by 41% in the third quarter — its strongest quarter reported so far in 2019 — and the company estimated sales would grow by 35% for the full year. It will report earnings for the fourth quarter Tuesday.

Investors and analysts are watching for signs that Walmart is turning its e-commerce sales growth into a profitable business. They’ll listen for signs of progress at Walmart’s investor meeting Tuesday at the New York Stock Exchange.

“They’ve put themselves in a great position to fight Amazon in the online world, but now they need to show less of a profitability drag from that initiative,” said Michael Baker, senior retail analyst for Instinet Do we call this Instinet Nomura? I’ve seen both.

Walmart’s path towards a thriving e-commerce business hasn’t been straightforward or simple?. It bought Jet.com for $3.3 billion in 2016 as a way to scale up its online sales and fend off Amazon. Its U.S. e-commerce division is led by Marc Lore, the Jet.com co-founder.

One of the driving forces behind Walmart’s e-commerce sales growth has been online grocery orders. Walmart touted its buy online, pickup in stores grocery business in its first Super Bowl ad.

It’s been experimenting with new ways to build loyalty, including a membership program for unlimited grocery deliveries and a service that delivers groceries straight to customers’ refrigerators.

It had more than 3,000 grocery pickup locations and more than 1,400 same-day grocery delivery locations at the end of the third quarter. It delivers online grocery orders to refrigerators in three cities so far: Pittsburgh, Kansas City and Vero Beach, Fla.

As Walmart expanded in e-commerce, it’s had some notable flops struggles? Not sure how to fairly phrase this. It acquired several e-commerce brands, including menswear maker, Bonobos; women’s casual clothing company, ModCloth; and women’s plus-size apparel company, Eloquii. Bonobos has layoffs last year and its founder, Andy Dunn, announced his exit from Walmart in 2019. Walmart sold Modcloth in late 2019 for an undisclosed amount. And Eloquii is reportedly still unprofitable.

On Thursday, Walmart pulled the plug on another e-commerce experiment: Jetblack. The membership-based service launched about two years ago and targeted busy, affluent families living in New York City. It allowed customers to text an order and get any item, except fresh foods, delivered to their home.

In its announcement, Walmart said it’d apply insights from Jetblack to e-commerce in other ways. The company said 58 of Jetblack’s nearly 350 employees will keep their jobs and become a team focused on conversational commerce within Walmart.

Growing the business has also come at a high price. Walmart’s U.S. e-commerce business lost $2 billion in 2019 — more than the company planned for the second year in a row, according to a report by The Wall Street Journal.

Walmart has not disclosed its e-commerce losses. Company spokesman Randy Hargrove declined to comment on them.

Lore said during third quarter earnings note: this was in the media call transcript that Walmart is making progress in reducing operating loss. Walmart also reported that its gross profit rate for e-commerce had improved year over year. How would you translate this to be less jargon-y? I want to make the point that their losses have gone up, but that’s also because their overall online sales are going up.

Analysts are mixed on whether Walmart’s e-commerce losses will decline or increase this year. Morgan Stanley analyst Simeon Gutman predicted the retailer will lose about $2.1 billion on an operating profit basis this year, up from his estimate of $1.9 billion in losses in 2019.

Baker of Instinet said he anticipates losses will shrink in 2020. He said Walmart now understands the fundamentals of e-commerce and it has less upfront investment, since it’s built out its online order and store pickup business at most U.S. stores.

Not sure whether to wave at this and if so, where it should go: Walmart may be tested by another challenge. It gets much of its inventory from China and that supply chain could be squeezed as the country deals with the fallout from the coronavirus.

Chuck Grom, a retail analyst for Gordon Haskett Research Advisors, said Walmart should capitalize on its track record with groceries.

“Their online grocery business has continued to be wildly successful, so a deeper dive in that is what people want to see,” he said.

He said the retailer should apply what it’s learned to sell more higher margin merchandise, such as clothes and home goods, online for store pickup. Walmart can also accelerate its path to profitability by improving efficiency in its supply chain, he said.

But Hilding Anderson, a retail consultant for Boston-based digital consulting firm Publicis Sapient, said prioritizing profits could be a risky strategy. To win in the long run, he said Walmart should focus on the customer experience and sales, not reeling in spending.

“Focusing too early on that profit instead of growth and delighting customers is probably counterproductive for them,” he said. “The measure of success is whether they are going to be thriving in 10 years.”

If Walmart pulls back on spending, he said its stock price may rise — but its market share could fall. “The Street doesn’t always reward long-term thinking and that’s the danger here,” he said. OR Wall Street “doesn’t always reward long-term thinking and that’s the danger here.”

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