Walmart's Earnings Report Just Proved It's A Legit Amazon Competitor

Shares of Walmart (NYSE:WMT) opened more than 2% lower on Thursday after the company’s second-quarter earnings report marked stagnant year-over-year profit growth. Nevertheless, the big-box retailer’s earnings and revenue figures topped expectations, and more importantly, it definitively proved that it is a legit contender in the war against Amazon (NASDAQ:AMZN) .

Earnings Results

Walmart posted adjusted earnings of $1.08 per share, just beating the Zacks Consensus Estimate and prior-year quarter’s adjusted earnings of $1.07. In an unforgiving retail landscape, this small earnings beat and miniscule year-over-year growth was enough to send the company’s stock lower on Thursday morning.

However, total revenues of $123.4 billion were up 2.1% year-over-year and ahead of our consensus estimate of $122.7 billion. Walmart U.S. same-store sales gained 1.9%, while Sam’s Club comps rose 1.2% (also read: Wal-Mart Tops Q2 Earnings on Higher Comps & Traffic).

Walmart now expects U.S. comps growth of 1.5 – 2.0% in the third quarter, and the company raised the lower end of its fiscal 2018 earnings guidance. Management now anticipates earnings of $4.30 – $4.40 per share, up from its previously announced range of $4.20 – $4.40 per share.

Interestingly, one piece of Walmart’s new report that could be perceived as a weak point is that operating income was down 3.2% to $5.97 billion. On a constant currency basis, operating income declined 1.6%.

Of course, operating income slipped, at least partially, because of the company’s aggressive investments in its e-commerce business. This spending started with the last year’s $3.3 billion acquisition of Jet.com and most recently includes the purchase of Bonobos.com (also read: Wal-Mart to Buy Online Men's Fashion Retailer Bonobos).

E-Commerce Is Key

While Walmart’s investments in e-commerce have taken a chunk out of its bottom line, this spending is an integral part of the company’s battle with Amazon—and today’s report revealed that the brick-and-mortar behemoth is actually holding its own in this fight.

In fact, management said that online sales and GMV were up 60% and 67%, respectively. No one is arguing that Walmart will eventually catch up to Amazon completely, but those are incredibly impressive growth rates, especially when one considers the unique advantages that Walmart has over e-commerce businesses.

As Cowen analyst Oliver Chen pointed out in a note today, Walmart’s physical assets should serve as a competitive advantage, as roughly 90% of the U.S. population lives within 10 miles of a Walmart store. Chen mentioned that special services like “ship-from-store, pick up today, online grocery, car pickup, discounted pick up in store, [and] associate delivery tests” will be the key to Walmart’ success.

Walmart has seemingly recognized this, and the company has started to push the envelope as far as what is possible in the realm of digital/in-store integration. Management has mentioned that by the end of the year, 100 stores will house its new Pickup Tower concept, which will allow customers to receive their online orders from a 16-foot automated dispenser that can hold up to 300 packages.

“Our strategy is to make every day easier for busy families,” Walmart CEO Doug McMillon said on the company’s earnings call. “To accomplish this, we continue our transformation to become more of a digital enterprise that moves with speed and agility. I’m encouraged by innovation in the business.”

Going forward, continued innovation in this area, in conjunction with positive customer response to these new ideas, will need to be Walmart’s focus. For now, it looks like this is exactly the company’s focus, and that should be incredibly encouraging for investors.

Walmart is currently a Zacks Rank #2 (Buy) and sports an overall VGM grade of “A.”

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