Walmart’s Margins Are Expected to Remain Pressured
Margins to remain low
Analysts expect Walmart’s (WMT) margins to remain subdued due to the company’s continued investments in growth initiatives. Walmart, like most of its peers, is investing in the price to drive store traffic. Walmart is investing heavily in its digital business to drive sales amid the growing threat from Amazon (AMZN), which is being treated as a headwind to its margins.
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During the last reported quarter, Walmart’s gross margin fell by 29 basis points to 25.7%. The prolonged price war among retailers and growing mix of online sales took a toll on its profitability. Increased shipping costs and investments in cash rewards pressured its margins. Walmart’s operating margin fell by 50 basis points to 3.9% in fiscal 3Q18. It reflected low gross margins and increased business investments.
In comparison, Costco (COST) and Target (TGT) have also been disappointing investors. Although Costco’s growth initiatives are estimated to be funded by increased membership fee income and cost-savings, its margins will likely remain muted due to price investments. Target’s lower pricing and higher promotions to drive store traffic are taking a toll on its margins. Increased digital fulfillment costs due to growing e-commerce sales remain a drag.
Going forward, the headwinds to Walmart’s margins probably won’t be subsided anytime soon. Walmart’s margins could continue to fall due to its price investments and focus on the digital business.