Walmart Inc. WMT, +0.49% announced plans to spend nearly $14 billion on capital investments, including enhancements to the supply chain, increased automation and other areas of the business that executives say will drive long-term sales growth.
Walmart paired its fourth-quarter earnings announcement with a virtual investor event in which the retail giant laid out its strategy to become “the primary destination for customers.” In other words, when you need to buy something, Walmart wants to be the first place that comes to mind.
“I always think of what it was like when I was a teenager and my mom was headed out the door and she would say, ‘I’m going to Walmart, what do you need?’ I didn’t really think about it then, but looking back on it now[…] she didn’t say ‘I’m going shopping’ or ‘I’m going to the grocery store.’ She said, ‘I’m going to Walmart,” said Doug McMillon, Walmart’s chief executive, during the event, according to FactSet.
Retailers now have to provide a level of service and convenience that customers have come to expect based on their experience with Amazon.com Inc. AMZN, -2.35% and other retailers. That includes speedy fulfillment options as well as access to a wide array of merchandise.
To do that, Walmart is beefing up its digital and e-commerce proficiency. Walmart reported 69% e-commerce growth in the U.S. in the fourth quarter. The company says it e-commerce revenue will approach $100 billion in the next couple of years, and $200 billion in the few years after that.
“We weren’t the first place you go when it’s time to buy products online. We’re trying to change that obviously,” McMillon said.
“[Y]ou’ve got to have assortment, you’ve got to have the price, you’ve got to provide service, you’ve got to deliver when you’re supposed to deliver… And it takes some time to build those kinds of capabilities.”
In percentage terms, Walmart expects its capital expenditure investment to be about 2.5% to 3% of sales over the next few years. In the past, when the company was focused on growing its supercenters, capex was 4% to 5% of sales.
Now the company says these investments will help it to stay ahead of customer behavior and boost the balance sheet.
“After a year or so of transition, these investments should put us in position for 4%-plus sales growth and operating income growth rates higher than sales,” said Brett Biggs, Walmart’s chief financial officer.
“Four percent top-line growth would basically be the equivalent of adding a Fortune 100 company every year.”
Walmart is also planning to make wage investments that will lift the average associate pay above $15.
“Once these increases are implemented, approximately half of our U.S. hourly associates, about 730,000 people, will earn at least $15 an hour,” said McMillion. “Our average wage in the U.S. will be at least $15.25 per hour. Our supply chain associates are already earning $15 or more and we’ve made additional wage investments in Sam’s Club over the last few years.”
The numbers may be eye-popping, but analysts were upbeat about the strategy.
“Omni-channel convenience investments are widening the moat vs. the competition,” wrote Bank of America analysts, who note that the investments should bring down the cost associated with delivery.
Bank of America rates Walmart stock buy with a $180 price objective.
“We are supportive of the increase in capex as Walmart is investing in the business from a position of strength, and these investments will help fuel long-term growth and market share gains, along with more efficient operations and profitability enhancements,” wrote Cowen analysts.
“We view investments in grocery automation as imperative to Walmart’s long-term online grocery ambitions, and Walmart+ membership growth and satisfied shoppers.”
Cowen rates Walmart stock outperform with a $170 price target.
Walmart has committed itself, as always, to “everyday low prices” (EDLP) and said the company has invested in prices. Some analysts had suggested prior to the earnings announcement that prices would come down in the near future.
“We view company commentary that gross margin is anticipated to be fairly steady in F2022 as favorable for consumer staples companies as Walmart views current price gaps relative to peers as good,” wrote Stifel analysts.
“We take this to mean Walmart is unlikely to aggressively reduce prices, including seeking price concessions from staples companies, given it thinks current prices on grocery items provide low price leadership.”
Stifel rates Walmart stock hold with a target price of $150.
Equity research firm Quo Vadis Capital is concerned about the impact that COVID-19 has had on Walmart. Essential retailers like Walmart that sell groceries, home goods and other high-demand items during the pandemic saw sales soar. As the pandemic comes to an end, there’s concern that these coronavirus beneficiaries will see sharp declines.
“At a very high level, we see Walmart’s FY20 performance benefiting from once-in-a-lifetime favorable conditions including spiking unemployment, stimulus checks for its customers, the temporary closure of both other retailers but also restaurants, and trip consolidation,” Quo Vadis said.
“Together the backdrop generated a value-seeking consumer, with free money to spend, fewer places to spend it, and making a conscious decision to choose large retail formats. There will be more free money for lower-income consumers in 2021. However, as these conditions unwind, we see lower average baskets and negative comps.”
Quo Vadis rates Walmart stock sell.
Analysts had expected Walmart stock to face pressure after the quarterly earnings and investment announcements. Shares closed Thursday down 6.5% and are on track to end the week down about 4%.
However, the stock has gained 17.8% over the past year. The SPDR S&P Retail ETF XRT, +1.49% has rallied 75.6% over the last 12 months. And the benchmark Dow Jones Industrial Average DJIA, +0.00% is up 7.8% for the period.