In our posts on May 25 and June 14, when we discussed how inflationary pressures and online retail is altering brick-and-mortar stores in today’s economy and resulting in widespread store closures, we found budget retailers, such as Walmart Inc. (WMT)to be relatively immune to the seismic shifts in the consumption ecosystem.
However, on May 18, it was disclosed that the big box retailer would be closing 21 stores in 12 states and DC this year , with four stores in Chicago being the latest to join the list owing to poor financial performance being cited by the company.
These closures would extend the trend of WMT closing a handful of stores across various states each year, with the company saying that the stores are "underperforming" without specifics.
Such developments could understandably dampen investor sentiments and confidence and even trigger panic regarding the retailer's financial health. However, counterintuitively, in its earnings release for the first quarter of the fiscal year 2024, the big-box retailer surpassed expectations for both earnings and revenue, with sales rising by nearly 8%.
Encouraged by the strong performance, WMT also raised its full-year guidance. It anticipates consolidated net sales to rise about 3.5% in the fiscal year. It expects adjusted earnings per share for the full year will be between $6.10 and $6.20.
However, it does not mean that the retailing giant has been completely immune to the bite of inflation. In fact, like a double-edged sword, it has cut both ways.
As we have discussed in a previous article, on the one hand, WMT has attracted new and more frequent shoppers, including younger and wealthier customers, who are turning to Walmart for both convenience and value.
However, on the other hand, as inflation factors into Americans’ spending decisions, the shift back to services is taking a bite out of sales of goods, particularly after a pandemic-fueled spending boom.
Moreover, spending trends weakened as the quarter continued, with the sharpest drop after February. Chief Financial Officer John David Rainey attributed that, in part, to the end of pandemic-related emergency funding from the Supplemental Nutrition Assistance Program and a decline in tax refund amounts.
Consequently, consumers have been buying fewer discretionary items, such as electronics and home appliances, and trading for lower-priced items. WMT’s sales have also reflected the shift toward groceries and essentials, with the former accounting for nearly 60% of the annual U.S. sales for the nation’s largest grocer.
In fact, WMT’s grocery business helped to offset weaker sales of clothing and electronics, as sales of general merchandise in the U.S. declined mid-single-digits, while sales of food and consumables increased low double-digits.
Another bright spot for the retail giant has been growth in online sales, which jumped 27% and 19% year-over-year for Walmart U.S. and Sam’s Club, respectively. According to Rainey, curbside pickup and home delivery of online purchases fueled the growth.
However, the increase in volumes online and overall came at the cost of a year-over-year decline in the company’s first-quarter gross margin rate since food has slimmer margins than other merchandise.
In order to protect and preferably increase its margins, WMT has been doubling down on initiatives to increase the efficiency of its operations.
As digital transactions now constitute about 13% and growing of its total annual sales in the U.S., WMT is cutting costs by reducing packaging.
On June 1, in its push for greater sustainability and lesser waste generation, the company introduced new packaging by using paper mailers and technology that makes custom-fit cardboard boxes.
WMT will add made-to-fit technology in about half of its fulfillment centers and for customers at all of its stores by the end of the year. Moreover, the nation’s largest retailer will also allow customers to skip plastic bags when retrieving curbside pickup orders.
While, at scale, the company’s switch to paper mailers is expected to eliminate more than 2,000 tons of plastic from circulation in the U.S. by the end of January, the sustainability push can come with cost benefits.
For example, with made-to-fit packaging, each box requires less material and plastic air pillows that cushion an item— making truckloads more efficient. The box changes also reduce labor for workers who previously made and taped the containers by hand. As a result, the company can realize significant savings in energy and workforce costs.
In its push for greater efficiency, WMT has also been leveraging Artificial Intelligence (AI) and Machine Learning (ML) by deploying them to improve both the customer and employee experience by figuring out what the customer wants and how best to get it.
For instance, one autonomous floor scrubber travels around in each store, keeping floors clean and free of debris while capturing, in real-time, images of more than 20 million photos of everything on the shelves daily with inventory intelligence towers.
WMT has trained its algorithms to discern the different brands and their inventory positions, taking into account how much light there is or how deep the shelf is, with more than 95% accuracy. Therefore, when a product gets to a pre-determined level, the stock room is automatically alerted so that the item is always available.
According to Anshu Bhardwaj, senior vice president of tech strategy and commercialization at WMT, employee productivity has increased by 15% since deploying this AI last year.
Moreover, for years, WMT has also been leveraging the vast amount of data generated by its ever-increasing online traffic to optimize its shopping app with the help of AI.
Given the optimization levels the retail giant is achieving in its internal processes through the proactive deployment of technology, it’s unsurprising that it is laying off hundreds of employees at e-commerce facilities nationwide.
WMT has confirmed eliminating hundreds of jobs at five fulfillment centers in Pedricktown, New Jersey; Fort Worth, Texas; Chino, California; Davenport, Florida; and Bethlehem, Pennsylvania.
Bottomline
In order to immunize itself from the risk of getting disrupted, the country’s largest retailer has embraced what Joseph Schumpeter has aptly described as creative destruction.
While it could mean continual realignment for its workforce, WMT shows promise as an investable and future-ready business.
