Wal-Mart execs defend expensive tech investments, will ‘take time to pay off’

Wal-Mart has in recent years spent billions on its e-commerce focus. The investments have included numerous acquisitions and significant internal growth at the retailer’s @Walmartlabs group. The investments have cut into earnings, and equity analysts are now wanting to know when the investments will pay off.

The question was the first one asked of Wal-Mart’s top execs when they met with analysts following the retailer’s annual shareholder meeting in Fayetteville on June 5.

Earlier this year Wal-Mart Chief Financial Officer Charles Holley said that the full year earnings per share guidance includes between 6 cents to 9 cents per share in e-commerce investment.

“We are focused on creating an endless aisle and appealing to our customers’ changing needs. (This year) we expect capital investments in e-commerce worldwide to be between $1.2 and $1.5 billion … and these investments will include technology, infrastructure and other areas to support e-commerce and digital initiatives to serve customers,” he explained during the company's February earnings call.

Last year Wal-Mart spent $1 billion on its e-commerce business. Holley said the greatest investment of capital for the e-commerce operations will come over the next 18 to 24 months, and then the investment should begin to moderate in fiscal 2018.

PROGRESS UPDATE
In defense of the spending, Walmart Global e-Commerce CEO Neil Ashe told analysts on June 5 that in the past three years the retailer has doubled the size of its e-commerce business.

“We’ve built out a new technology platform in the U.S. and built a new fulfillment network. We have also built thriving businesses outside the U.S. in Brazil, China and the U.K. We feel good about our progress,” Ashe said. “Now we are starting to use that infrastructure to try and transform the shopper experience in e-commerce and in stores and clubs.”

Ashe said to build out a new online platform at Wal-Mart’s global scale that handles global e-commerce, digital commerce and integrate in the supply chain fulfillment in just 2.5 years is “pretty special.”

“It was engineered with next generation architecture that is built to scale and now can have an impact on not only e-commerce business, but also throughout the rest of the enterprise,” he said.

Ashe also said part of the reason the investment is higher is because “we are building out a lot of businesses from the ground up, digital and e-commerce at one time. If we could build them one at a time they would fund each other, but doing all that at once raises our cash outlay.”

SALES, M&A
This year @WalmartLabs said it expects global e-commerce sales of $12.5 billion, but driving e-commerce sales higher is not the only focus of its operations. Ashe reiterated that new technology innovations are starting to permeate the entire organization with the goal of better customer service.

“Looking forward we expect an increase in global e-commerce sales of around 25% in fiscal year 2016, and we anticipate growth over the three-year period from fiscal years 2016 through 2018 to average 30 to 40%,” Holley said.

In the past five years, Wal-Mart has acquired 14 startups to the tune of roughly $2 billion according to Wall Street estimates. Ashe told reporters during shareholders week that @WalmartLabs is always looking for possible tech acquisitions because it will never have all the pieces in place given the constant changes underway.

“We have made a number of tech acquisitions since I’ve been here, but more interestingly we have found pieces of technology, capabilities, talent and groups of people that we have integrated into our enterprise. You should expect to see even more of those going forward,” Ashe said.

INNOVATION FOCUS, PATIENCE REQUIRED
Wal-Mart CEO Doug McMillon told the analysts that progress is being made to build the infrastructure needed to help the retailer integrate online and in-store capabilities. Now he said the focus is more on innovation looking forward to those applications that shoppers do not yet know they want.

“These are innovations that will help customers save time as well as money. “We are all aware that we have a 52-year-old model that historically performed on the backs of supercenters. Today we must integrate technology and find the best ways use these assets while also improving the overall customer experience,” McMillon said.

In the short-term he said the company is excited and comfortable about the cash allocations and investments in technology.

“We understood when we made them that it would take time to pay off. We can’t magically answer for you which date these investments will return profits. It will be quarter to quarter improvements,” he said.

McMillon said the retailer’s overall spending is putting pressure on short-term earnings, but said Wal-Mart has to “get this right” which is why they have become more flexible in testing new ideas simultaneously. He said the nimbleness is allowing them to the test and learn quickly and hopefully fail less often. McMillon told the analysts that tech spending would be higher for three years and they would just have to wait and see how this pays off in the months, quarters and years ahead.