Why Walmart’s US Segment Is So Crucial
Operating metrics look promising
Wal-Mart Stores’ (WMT) US segment is witnessing healthy trends—a big positive for the company, as the segment accounts for the majority of its revenue and margins. In fiscal 2017, the segment contributed about 63% to the total revenue and generated more than 78% of the total operating profit.
The segment’s key operating metrics are showing signs of improvement, with customer traffic rising during the past nine consecutive quarters. During the last reported quarter (fiscal 4Q17), the segment’s comparable store sales, or comps, rose 1.8%, driven by a 1.4% increase in customer traffic and a 0.4% rise in average tickets.
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Walmart’s management noted that all of its store formats reported positive comps, while the US segment also benefitted from the company’s e-commerce initiatives, which contributed about 40 basis points.
Segment performance by merchandise
Despite the ongoing deflation in the food category, Walmart’s US segment posted low single-digit growth in grocery, with notable growth in food and consumables traffic. Continued demand for beauty, cosmetics, and pets products, led by improved offerings, drove the consumables segment growth. However, deflation adversely impacted the food comps by about 90 basis points during fiscal 4Q17.
Meanwhile, the strong performance of the health and wellness and general merchandise category contributed significantly to the segment’s growth. The health and wellness category witnessed mid-single-digit comps growth in 4Q17, driven by growth in OTC and pharmacy script, coupled with inflation in branded drugs. The general merchandise category witnessed strong sales in apparel, home, seasonal, and hardlines. Comps increased in the low-single digits during the reported quarter.
During its 4Q17 conference call, Walmart’s management noted that sales for the US segment have been slower than expected so far this year, while it expects comp sales growth for fiscal 1Q18 to be in the range of 1%–1.5%.
Despite the slow start in 2017, Walmart’s US segment is likely to post strong results in fiscal 2018, driven by an improved in-store shopping experience, the expansion of its online grocery, and strong e-commerce sales. Meanwhile, the company’s improved and innovative product offerings are likely to drive category growth.
Notably, ETF investors looking for exposure to the Consumer Discretionary sector might consider ETFs like the VanEck Vectors Retail ETF (RTH), which invests about 33.1% of the portfolio holdings in Amazon.com (AMZN), Walmart, Kroger (KR), and Costco Wholesale (COST).