Digital Services are Fueling Walmart's Low Prices
Digital Services are Fueling Walmart's Low Prices
U.S. Advertising is up 26 percent while data ventures doubled.
Walmart kicked off retail earnings season by reporting something we all knew: inflation is still tightening people's wallets, and folks headed to the discount retailer for help. Same-store sales grew 3.8%, while U.S. revenue increased 4.6% to $108 billion. If you ask Walmart's executives, the growth is largely about convenience. "The story or the word we've been using here is convenience. We are not just a play for value anymore," CFO John Rainey told investors this week.
Their narrative is easy to follow. Walmart has invested billions of dollars in becoming an omnichannel retailer. They are offering customers the ability to shop any way they like. Online, in person, and on the go. While this convenience is undoubtedly impressive, let's be realistic here.
Lower prices are driving the growth.
Analysts at Evercore IRI noted that shelf prices were 25 percent lower at Walmart than at traditional supermarkets, all while the company expanded its gross margin.
What’s going on here?
“We should help kind of clarify that a bit so that people don't have the wrong perception that gross margins are going up due to price,” CEO Doug McMillion said. Instead, the expansion was driven largely by about $300 million in growth “from our high-margin businesses like advertising, membership data ventures, and analytics.” These sectors not only diversify Walmart's revenue streams, and give them cutting edge capabilities, but they feature significantly higher margins than traditional retail. U.S. advertising sales are up 26 percent, while revenue from data ventures doubled.
In the eCommerce sector alone, Walmart achieved a remarkable 12.5 percent incremental margin last quarter; every dollar added through e-commerce contributes 12 cents of profit to the company. CFO Rainey said the margin was about three times the company's normal take. This helped the retailer execute 7,000 price rollbacks last quarter, a 45% year-over-year increase.
Walmart's Earnings in a nutshell
Overall, revenue of $161 billion, up 5.8%; U.S. revenue of $108B billion, up 4.6%
U.S. Operating income $5.5b, up 9.6%
The company expanded earnings guidance for the year
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Target boasts ten private-label brands with over $1 billion in sales.
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They said it
CEO Doug McMillion on the role of new services and profit margins
We'll manage our merchandise margins like we always have and make sure that we're providing value. But as we report gross margin, it does reflect newer businesses that are helping us mix things up. And so we're using terms inside the company like our merchandise or product margins as distinguished from gross margins.
So maybe, John David, as we think about our future reporting, we should help kind of clarify that a bit so that people don't have the wrong perception that gross margins are going up as a result of price. They're not. If you look at rollback, for example, as John mentioned in the U.S., as we mentioned earlier this morning, we're seeing a lot of rollbacks. Suppliers participate in a majority of those, but not all of them. We're to lead on price and we're going to manage our margins, and we're going to be the Walmart that we've always been.