Walmart (WMT +0.71%) announced mostly good news in its mid-May earnings report. While growth is slowing as compared to last year's surge, the retailer capitalized on a few favorable trends, which are set to keep sales rising after last year's record surge.
Management is still predicting a prolonged period of increased investment spending that threatens to pressure cash flow over the next few years. But it is more bullish on the rest of this fiscal year, and for Walmart's long-term growth prospects after a solid start to 2021.
Let's look at a few takeaways that CEO Doug McMillon and his team had for investors in Walmart's latest conference call with Wall Street analysts.
Image source: Getty Images.
1. The consumer still wants to shop
"Economic stimulus is clearly having an impact, but we also see encouraging signs that our customers want to get out and shop." --McMillon
Walmart's growth slowed as the pandemic impact waned, especially in the U.S. market. Comparable-store sales gains landed at 6% versus the 9% notched through 2020.
Yet the first quarter was characterized by wins across several important areas, including improving store traffic, continued booming demand online, and rising market share in the grocery store niche. Walmart also managed to keep its supply chain humming despite inventory pressures and global shipping challenges. The best news, according to the team, is that all indications are that the demand spike will last even after federal stimulus measures fade.
2. More spending is needed
"The top of the flywheel starts with being the best first place people shop." --McMillon
Walmart is expecting to pour at least $14 billion into the business this year while keeping its capital spending elevated for several additional years to come. Management detailed a few of the reasons for that investment priority, which is aimed at keeping its platform at the top of consumers' shopping choices.
A few of those initiatives are remodeling stores, adding inventory online, and speeding up delivery services. Walmart credited these factors for lifting demand for its membership service and supporting higher customer satisfaction overall. "We need more capacity to get ahead of demand," McMillon said, "and we remain convinced these investments are smart ones."
The downside is that the spending will pressure cash flow over the next few years, implying lower stock repurchase spending.
3. We're breaking our outlook tradition
"Our typical practice is to not update guidance until the second-quarter release. But we're in an unusual period where Q1 stimulus led to meaningful sales and profit tailwinds that weren't contemplated when we provided guidance in February." --CFO Brett Biggs
The strong start to the year was enough to convince management to deviate from its usual pattern of waiting until Q2 before updating the annual outlook. It now sees sales and profits both rising faster in 2021, mainly thanks to strength in the U.S. market that was lifted by federal stimulus measures and by relaxing social distancing requirements.
The pandemic still threatens business trends, especially in a few international markets like India. But Walmart expects faster growth in the current quarter than executives predicted back in February.
Investors will still get a second-half forecast update following the Q2 results in August. That outlook might feature another significant upgrade if consumers' drive to shop doesn't plummet before then.
