Walmart execs defend Flipkart deal, Sam’s Club closures; talk supercenter potential

Walmart CEO Doug McMillon and his top management team on Friday were asked repeatedly by equity analysts about the recent $16 billion investment for a 77% majority stake in Indian e-tailer Flipkart.

The investors, in Fayetteville for the 2018 shareholders meeting, had plenty of questions about the timing of the blockbuster deal and sought more information on the metrics needed to sustainably grow the global and U.S. e-commerce business without compromising the U.S. store business which fuels the company financially.

McMillon said opportunities rarely come at a perfect time. He said with the solid growth in the U.S. business providing a strong financial foundation, the management and board believed the investment for the future was worth the short-term risk to earnings.

“In India, it’s worth it,” McMillon said. “I believe we will look back five to 20 years from now and say it was a bold bet, but it was worth it. We are not running this thing for a year. We’re looking for long-term success.”

He was asked if there was any nervousness going into India given the retailer’s track record and regulatory hurdles imposed by the government. McMillon said the company weighed all the risks but still sees opportunities to help grow Flipkart with supply chain expertise that could reap benefits in the future and in other countries.

“We are being patient and hope the [Indian] government sees it that way,” McMillon said.

With respect to shifts in the international market while also tweaking an improving U.S. business, McMillon said “it’s like we’re changing the wheels on the car as we drive it.”

Walmart Chief Financial Officer Brett Biggs told investors when the underlying business of Walmart U.S. is healthy it allows the company to take more risks. Judith McKenna, CEO of Walmart International, said the size of the opportunity in the Indian market – the second-largest country by population with an estimated 1.354 billion residents –  for the long term is unparalleled in the world. She said Walmart has been watching India, waiting for the right time to take the plunge with respect to e-commerce. McKenna said e-commerce has just 2% market penetration in India, but is poised to quickly accelerate.

“Flipkart is not just another e-commerce retailer. They have created a platform operating in the market from a position of strength,” McKenna said.

She said Flipkart was attractive because of its ancillary segments, which include two fashion businesses, e-cart final-mile logistics arm, and open-source phone pay platform that allows for peer-to-peer payments.

GROWING U.S. E-COMMERCE
Analysts also asked the Walmart execs about the scale needed to drive down costs so the e-commerce business could become profitable. McKenna said Walmart has two executives that scour the world once a quarter seeking new technologies that could help the retailer become the premier omnichannel player in every market it operates.

Walmart has said omnichannel – a mix of e-commerce with physical retail stores – will be the future for retail. And the success of omnichannel is to obtain a quality product assortment, said Marc Lore, CEO of Walmart U.S. e-commerce.

“There are thousands of brands we don’t carry because they don’t want to sell on Walmart.com. We want those brands and are making some progress,” like recently securing the full lineup of Apple products and new items with the Lord & Taylor partnership, Lore told the analysts.

With roughly 75 million items available online, Lore said the company is 50% of where it wants to be. He was clear it’s about finding the right items, and not just getting more items. He said some of the growth will come from third party sellers, but warned Walmart won’t tolerate third party marketplaces that can’t deliver the service level it expects. Lore said some merchants have been culled for that reason.

CLUB CLOSURES
On Jan. 11, Sam’s Club CEO John Furner announced the closure of 63 clubs, which would reduce the number of U.S. clubs to 597. The move resulted in about 9,500 jobs lost, but the company said 10 of the stores would be converted to e-commerce distribution centers.

McMillon said he and Furner knew there were several clubs weighing down the segment’s overall performance. He said in some cases it was the location, with some stores part of previous acquisitions made by Walmart. Furner also said management sought to restore the club business operating model to focus on the business segment instead of trying to function like Walmart. He began by redefining and simplifying membership deals and targeting households with annual incomes between $75,000 and $124,000 who might also own a small business.

He said without the weight of the non-performing clubs the business was able to grow traffic slightly higher than its improved comp sales. He said focus on fresh and the Member’s Mark private brand are also paying off as the the majority of the comp sales improvement was coming from this base.

The company recently opened it first e-commerce fulfillment center in one of the closed clubs in Memphis. Furner said it took just 46 days to open the facility which is located near a major Federal Express hub.

He told the media on Wednesday the first shipment from the facility recently arrived at his office a bit unexpectedly. Furner said they shipped his favorite coffee with a note saying “We’re open for business.”

Furner said the company plans to add a few additional fulfillment centers when the timing is right.

SUPERCENTER POTENTIAL, FAIR TREATMENT
Walmart U.S. CEO Greg Foran told the investment community the business is making positive strides but there is “always more” to be done. He said a business with scale that can achieve 3% comp sales over time provides the opportunity to level costs and grow balance sheets.

Walmart’s overall operating margins have declined from around 7% three to four years ago to roughly 5%. Part of that drop relates to the retailer’s investment in prices to be more competitive with discounters, investments in e-commerce, and more money spent on wages and training.

Foran said the trick is how well the entire big box store is managed. He said eggs may sell for 44 cents a dozen and milk for 99 cents with virtually no margin or at a loss, but apparel has a higher margin. Foran told the media during a Thursday event that managing the supercenter well is one of the best ways to drive costs out of the business.

While U.S. stores are operating better, Foran recently told Talk Business & Politics, there are still big opportunities in at least one-third of the company’s stores to raise the bar and create more potential for sales and profit growth.

McMillon spoke with the media following the Q&A with the analysts. When asked if he would like to see Wall Street evaluate the company differently given e-commerce and technology investments and be treated more like Amazon, McMillon declined the need for special treatment.

“We are not asking for a pass on anything as we take on the responsibility of managing the short and long term,” he said. “The investments like those in Flipkart have a longer-term horizon, but we are a longer-term company. Wall Street should evaluate us based on our performance.”

He also was asked what online categories and products he would like to see added to the Walmart mix. McMillon told the media he hasn’t always purchased his clothes at Walmart, but since acquisitions like Bonobos, Jet.com, and the Lord & Taylor partnership, he no longer has to shop anywhere else.

“Being totally open, there were times I never bought all my apparel at Walmart,” McMillon said. “But I am buying a lot from Bonobos these days and with the Lord & Taylor addition I don’t know if I need to shop anywhere else. That’s really exciting.”