Topics this week…Consumables Corner – 1) U.S. store growth is full steam ahead, with discounters leading the way, 2) Discounters tend to bring down prices in surrounding areas, and 3) BJ’s earnings preview Amazon A to Z – The meal delivery trend shows no signs of slowing with Amazon’s recent investment in Deliveroo Quote of the Week – Home Depot CFO, Carol Tomé, on the U.S. housing market
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If WMT can repeat its 1Q20 performance going forward without slowing sales, there could be significant upside to our estimates. From our perspective, however, we think that in order to maintain the level of sales Walmart is experiencing, the company will likely need to invest more in price, more in wages, and more in ecommerce logistics with 1-day shipment and assortment. As we discussed in our post-earnings note and downgrade to Underperform, central to our thesis is that WMT is mining its U.S. store fleet to fund ecommerce initiatives abroad and that many of the benefits experienced are likely to fade as price gaps to competition begin to slow traffic growth in the core U.S. business. Indeed, the quarter was marked by a surprisingly profitable Walmart U.S., partially offset by a surprisingly less profitable Walmart International.
Our total Walmart basket is up very slightly from the prior week, with the largest changes being potato chip price increases (+12.6% sequentially, -1.3% y/y) mostly offset by pretzel price decreases (-7.8% sequentially, -5.2% y/y). Our total Walmart basket remains up y/y (+1.0%) driven primarily by HPC (+1.8% y/y) and Pet (+4.4% y/y). Of note, CPB continues to face difficulty on the pricing front, and although the move in pretzels is seasonal, the price decrease for the spring/summer seasons this year happened later and is around 7% below last year’s spring/summer decrease. Coupling this with our view on the difficulties facing the company in its core soup category and we remain Underweight rated on CPB ($32 PT), which is set to report its 3Q19 earnings on 6/5.
Topics this weekend…
Walmart’s World – WMT’s 1Q20 was strong, but we think is supportive of our underlying Underperform thesis longer-term
Amazon A to Z – Pedal to the Metal
Hardlines Happenings – Tariff impact analysis on HD, LOW, and BBY
Target’s Tidings – TGT earnings preview
Quote of the Week – Ford CFO Time Stone’s comments on AMZN/Whole Foods
Walmart reported 1Q20 earnings this morning (5/16/2019) before the market opened with U.S. comps of 3.4% (in line with our and Consensus estimates) and Adj. EPS of $1.13 (above our and Consensus estimates of $1.02). Walmart U.S. EBIT came in above our expectations ($4.1bn vs our $3.8bn), Sam’s Club EBIT was above our expectations ($0.5bn vs our $0.3bn), and International EBIT came in below our expectations ($0.7bn vs our $1.0bn). In Walmart U.S., gross profit rate expanded 6 bps and operating expenses leveraged 10 bps. Guidance for the full year was reiterated. The equity is up approximately 2.7% as of 12:00pm ET following the report.
Topics this week…
Walmart’s World – 1) Is Walmart underinvesting in labor?, and 2) 1Q20 Earnings Preview
Consumables Corner – Birth rate data hits lowest level since 1986
Amazon A to Z – 1) Amazon has best-in-class shipping, and 2) Amazon is unrivaled in fulfillment
Quotes of the Week – Amazon is supporting employees starting their own package delivery businesses
Walmart today (5/14/2019) announced that it would offer free NextDay delivery to Walmart.com customers in Phoenix and Las Vegas and expand to Southern California in the coming days. The company plans to expand the service to reach approximately 75% of the U.S. population this year, including 40 of the 50 top major U.S. metro areas. There will be up to 220k SKUs available, with additional assortment to be added, and will be available on eligible orders of $35 or more. Walmart also stated that it will cost less to deliver orders the next day because eligible items come from a single fulfillment center located closest to the customer.
Our total Walmart basket is up slightly from the prior week primarily driven by HPC as a result of a $0.72 (6%) price increase on Clorox disinfecting wipes. However, we would note the sequential moves among food companies are showing mostly down or flat pricing movement (see the one week sequential chart on page 1). Further, the 4 week rolling average has become slightly negative for almost every company we track with Mondelez and Nestle declining the most (see four week sequential chart on page 2). In our opinion, this is something to be watched if the weakness we have seen in our survey over the last couple weeks gets worse.
On Friday 5/10, we hosted a guided tour of Amazon’s BOS7 Fulfillment Center in Fall River, MA. The center was one of 25 “non-sortable” centers with larger items, was approximately 1.2mm of square feet (with an additional 500k of mezzanine), holds approximately 450k SKUs, and employs over 1,200 people. Like any of Amazon’s fulfillment centers, viewing the process of how Amazon delivers packages from door to door is a spectacular sight to behold, with the sheer size of the center, the volume of packages leaving the door, and how the company has implemented its technology to automate processes.
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