Walmart execs discuss 4% growth strategy, innovation efforts, and margin expansion

Walmart’s executives made a hard sell on innovation – especially with supply chain automation – to the investment community Tuesday and Wednesday (April 4-5) at the retailer’s investor conference in Tampa, Fla.

Automation will drive better efficiency throughout the supply chain, including stores and along with its people, will be the secret sauce of success as a growing omnichannel retailer this year and beyond, according to the pitch.

Walmart CEO Doug McMillon reiterated Walmart’s first-quarter guidance of consolidated net sales growth between 4.5% and 5% on a constant currency basis. They expect consolidated operating income to increase 3.5% to 4% on a constant-currency basis. Walmart expects earnings per share of $1.25 to $1.30 after a small adjustment for inventory write-down.

For the full year, the company expects consolidated net sales to grow between 2.5% and 3%. Walmart U.S. comp sales are expected to increase between 2% and 2.5%, excluding fuel. Sam’s Club U.S. comp sales are expected to grow about 5.0%, without fuel. Walmart International net sales are forecast to grow by about 6%. Consolidated operating income is forecast to increase by approximately 3%. Adjusted annual earnings guidance ranges between $5.90 and $6.05 per share.

“As we grow, we will improve our operating margin through productivity advancements and our category and business mix, and drive returns through operating margin expansion and capital prioritization,” McMillon said. “We are in a unique position to serve our customers and members however they want to shop, which will fuel continued growth.”

Walmart is committed to 4% sales growth and 4% operating income growth over the next three to five years, and margin recovery is a priority.

SUPPLY CHAIN 
Walmart is re-engineering its supply chain to fulfill customer needs with a more intelligent and connected omnichannel network enabled by greater use of data, software and automation. The goal is to improve in-stock (product availability shelves), inventory accuracy and flow whether customers shop in stores, pickup, or have a delivery.

The retail giant showcased its supply chain innovation to analysts on Tuesday at its regional distribution center in Brooksville, Fla. Walmart said the automated distribution center is just one aspect of how the company is building a scaled system of supply chain capabilities that uses a combination of data, software and robotics.

Walmart said it is using automation and technology to increase item storage so distribution centers can provide a more consistent and predictable delivery service to stores and customers and also react more quickly to customer demand. The retailer said it has invested heavily in the past year so that stores can operate as a place to shop as well as fulfillment centers and delivery stations.

Walmart said by 2025, it believes 65% of its stores will be serviced by automation, approximately 55% of fulfillment center value will move through automated facilities, and unit cost averages could improve by about 20%.

As the changes are implemented, Walmart said one of the outcomes is roles that require less physical labor but have a higher rate of pay. The company anticipates increased throughput per person, due to the automation while maintaining or even increasing job numbers.

“It all starts with our associates,” McMillon said. “We are a people-led, tech-powered omnichannel retailer. As it relates to being people-led, it’s about purpose, values, culture, opportunity and belonging. We serve our associates by creating opportunities. Opportunities that turn jobs into careers. We help bring dignity to work by enabling them to see how they’re serving others, as part 1 of a team, and helping them achieve their potential.”

The Bentonville-based retailer recently laid off about 2,000 employees from e-commerce fulfillment centers in California, Florida, New Jersey, Pennsylvania and Texas. Walmart said the workforce reduction was necessary as the company opted to reduce or eliminate evening and weekend shifts.

FINANCIAL FRAMEWORK
Walmart also spoke at length about the financial framework for how it plans to deliver on better net income, driven by higher sales, improved efficiency and cost savings. The plan centers on three key building blocks: sales growth from its omnichannel business model; diversifying revenue streams through improved category and business mix; and scaling proven, high-return investments that improve operating margins.

“We believe that we have the building blocks in place to help define the next chapter of retail and do so while driving strong growth and shareholder returns,” said John David Rainey, Walmart’s chief financial officer.

“Looking at where we are today, we believe that approximately 4% sales growth, and growing operating income at a faster rate, are still the appropriate targets for our business over the next 3 to 5 years. The investments we’ve made have positioned us well, and stand to generate steady and sustained growth at higher margins. Achieving our targeted 4% sales growth over the next five years would add more than $130 billion of sales on top of our roughly $600 billion base today. On top of that, we think the opportunity for operating income growth over the next 3-5 years could be better than what we’ve outlined.”

INVESTMENT COMMUNITY REACTION
Ben Bienvenu, a retail analyst with Stephens Inc., said he heard enough from the conference to reiterate his overweight or “buy” rating on Walmart shares with a price target of $170.

“We expect to hear more details around the company’s long-term supply chain evolution and financial growth goals Wednesday,” Bienvenu noted.

Retail analysts with The Street Quant Ratings also rank Walmart shares a “buy” despite the stock’s “somewhat disappointing return on equity.”

“The buy rating is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company’s strengths can be seen in multiple areas, such as its increase in net income, revenue growth, good cash flow from operations, growth in earnings per share and relatively strong performance when compared with the S&P 500 during the past year,” TheStreet.com noted.

Analysts at TheStreet.com also said, “looking ahead, although the push and pull of the overall market trend could certainly make a critical difference, we do not see any strong reason stemming from the company’s fundamentals that would cause a continuation of last year’s decline. In fact, the stock is now selling for less than others in its sub-sector in relation to its current earnings.”

Walmart shares (NYSE: WMT) opened higher on Wednesday at $148.53, up $1.30 from Tuesday’s close. For the past 52 weeks, Walmart’s stock has traded between $117.27 and $160.77. Year to date, the share price is down 7%.