Walmart (NYSE: WMT) has been defying critics of its digital strategy. Since its $3.3 billion purchase of Jet.com in 2016, the retailer’s online sales have gone from practically nonexistent to a high-growth endeavor. Under the guidance of Jet.com founder Marc Lore, who now leads all of Walmart’s domestic e-commerce operations, the company is showing no signs of slowing down in its digital expansion.
2017 was another busy year on the acquisition front; Walmart added four more digital retailers and a same-day-delivery technology start-up to its spoils. But as busy as 2016 and 2017 were, the company’s 2018 spending spree has been even more ambitious.
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Reviewing Walmart’s 2018 prizes
The retailer has added two more U.S. online fashion brands to its stable this year, but it made much bigger waves early in the year when it took control of or invested in several international e-commerce ventures.
Also of note this year was a new collaboration with Japan’s Rakuten to launch a grocery delivery service in Japan and an e-book/audiobook business in the U.S. Walmart will also begin selling Rakuten Kobo eReaders in its stateside stores and on its website.
Investments that will pay off later
Walmart’s spending spree in the U.S. has already begun to pay off. Last quarter, its domestic e-commerce sales increased 43% year over year. That helped drive a 3.4% increase in comparable-store sales. Delivery, Jet.com, improvements to the Walmart.com site, and online-order/in-store pickup have all helped. But adding specialty retailers like Bare Necessities and ELOQUII to complement existing offerings on Jet.com and Walmart.com has also helped the retailer attract new customers.
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With its American digital business now in growth mode, it’s clear what Walmart is after next: growing its presence overseas. Investing in e-commerce markets — especially in the emerging economies in India and China — will take time before investors see positive earnings traction. For example, Walmart says the Flipkart deal will negatively impact earnings per share by $0.60 next year. In the meantime, Walmart’s heavy spending — both at home and abroad — has put pressure on the bottom line. Through the first three quarters of the current fiscal year, GAAP EPS has fallen 60%. As a result, Walmart’s trailing-12-month price-to-earnings ratio has ballooned to 53.2.
However, based on price to free cash flow (cash provided by operations less capital expenditures), Walmart is still on solid footing. That ratio currently sits at 15, a reasonable price for a company that is investing aggressively in the fast-growing digital marketplace. It may take time for a payoff, but patient Walmart investors have a lot of irons in the fire that could yield big results in the years ahead.
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Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends JD.com. The Motley Fool has a disclosure policy.
