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Walmart’s Operating Margin Might Be under Pressure

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Sep. 23 2016, Updated 12:07 p.m. ET

Improvement in fiscal 2Q17

Walmart (WMT) delivered a higher gross margin in fiscal 2Q17, which ended on July 31, 2016. Its gross margin rose about 60 basis points to 25.1% that quarter. The improvement in its gross margin was driven by better margins in food and consumables, procurement savings, and lower transportation expenses due to lower fuel costs in its US segment.

The company also attributed its gross margin improvement to efficient inventory management and the implementation of its cost analytics program in certain international markets.

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Operating margins

Walmart’s operating margins improved in 2Q17 by about 10 basis points to 5.2% on a year-over-year basis. The slight rise in the company’s 2Q17 operating margin was due to a higher gross margin, which was partially offset by a rise in SG&A (selling, general, and administrative) expenses as a percentage of sales.

The operating margin for Walmart’s rival Target (TGT) rose to 7.7% in fiscal 2Q16[1. Fiscal 2Q16 ended on July 30, 2016.] compared to 7.6% in fiscal 2Q15. This rise came in as a higher SG&A rate and was more than offset by an improved gross margin. Walmart’s grocery business peers Kroger (KR) and Whole Foods Market (WFM) reported operating margins of 2.5% and 5.6%, respectively, in their comparable quarters.

The Consumer Staples Select Sector SPDR ETF (XLP) has a 5.9% exposure to Walmart.

Why margins might be under pressure

Walmart’s operating margin fell to 4.8% in the first half of fiscal 2017 from 5% in the comparable period of the previous fiscal year. Overall, the company’s operating margin might continue to be under pressure in the second half of the year due to higher wages and continued investments in online growth and information technology.

Walmart is implementing several productivity measures to improve its margins. It continues to run its cost-reduction programs in the United Kingdom and Canada, its key international markets. The company is also extending its cost analytics programs to other international markets, including Mexico and China.

We’ll take a look at Walmart’s shareholder returns in the next part of this series.

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