(Bloomberg)—Walmart Inc., No. 3 in the Internet Retailer 2019 Top 1000, advanced after meeting sales estimates and indicating that shoppers will absorb some of the costs from President Donald Trump’s tariffs on Chinese imports.
Web sales in the U.S. increased 37% in the first quarter, slightly ahead of the company’s expected growth rate for the full year. Walmart and rival Amazon.com Inc. (No. 1) are locked in a fierce battle for internet shoppers, and both have recently pledged to speed up delivery times. While Amazon has the overall lead in ecommerce, raking in about 50 cents of every dollar spent, Walmart has the best-developed web grocery business with 2,450 stores offering curbside order pickup.
Walmart’s online growth has come at a cost to profitability, though. Gross margins of 24.3% were in line with analysts’ estimates but did mark a slight year-on-year contraction. That can be attributed to higher labor costs, plus online sales that typically deliver lower margins than in-store sales. Transportation expenses, meanwhile, have eased somewhat this year, the company said.
On the down side, Sam’s Club’s same-store sales fell short of estimates, dragged down by reduced tobacco sales. But Sam’s Club’s ecommerce sales grew 28%.
“Our first quarter results put us in a good position to achieve full-year goals,” chief financial officer Brett Biggs says.
Comparable sales for Walmart stores in the U.S. climbed 3.4% in the first quarter, its best for the period in nine years. Sales of groceries—Walmart’s biggest business—fueled the increase, and a later-than-usual U.S. flu season boosted health and wellness products. The shares rose as much as 3.7% Thursday in New York, the biggest intraday gain in almost three months.
“This is a very good set of results,” Neil Saunders, an analyst at GlobalData Retail, said in a note. “The U.S. operation remains the star of the show.”
Tariff concerns
Walmart’s response to potential higher levies will likely set the tone for other discount retailers, and its decisions on whether to pass along or absorb the additional costs will have ripple effects on American consumers. In its favor, Walmart’s clout with suppliers gives it more room to maneuver, and much of its food comes from U.S. sources, easing the impact.
“We will do everything we can to keep prices low but increased tariffs lead to increased prices,” Biggs said in a Thursday morning interview. “It’s very item- and category-specific. There are some places where as we get tariffs, we will take prices up.” Shifting its sourcing, or finding more manufacturers outside of China, “is one of a number of actions that our merchants are considering.”
Tariffs, according to Evercore ISI analyst Greg Melich, are “the next key swing factor,” as they could “wipe out” earnings growth across the sector this year.
“As for tariffs, potential impact on Walmart and its shoppers is limited by its food business, and we also believe Walmart has the wherewithal both financially and via its vendor relationships to minimize the impact on both itself and its shopping base,” stated Charlie O’Shea of Moody’s.
It’s not a Walmart-specific issue: Macy’s Inc. (No. 5) said Wednesday that the latest tariffs, if implemented, would likely be reflected in its prices. Ralph Lauren Corp. (No. 85) also said after reporting results this week that consumer price-hikes could be an end result, though it’s first trying to work with Chinese suppliers to drive down costs and further diversify its supply chain out of China.
“It is hard to do the math to find a path that gets you to a place where you don’t have a customer impact,” Macy’s CEO Jeff Gennette said on an earnings call Wednesday, describing the impact of the U.S.-China trade negotiations as a “stay tuned” situation.
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